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0001104659-01-501942.txt : 20010815 0001104659-01-501942.hdr.sgml : 20010815 ACCESSION NUMBER: 0001104659-01-501942 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERSANT CORP CENTRAL INDEX KEY: 0000865917 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943079392 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28540 FILM NUMBER: 1713303 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 10-Q 1 j1181_10q.htm 10-Q Prepared by MerrillDirect

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 000-28540

	VERSANT CORPORATION
	(Exact name of registrant as specified in its charter)

California			94-3079392
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

		6539 Dumbarton Circle Fremont, California 94555
		(Address of principal executive offices) (Zip Code)

		Registrant's telephone number, including area code: (510) 789-1500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

The number of shares of common stock, no par value, outstanding as of July 31, 2001: 12,005,015

VERSANT CORPORATION
FORM 10-Q
Quarterly Period Ended June 30, 2001

Table of Contents

Part I. Financial Information

	Item 1. Financial Statements

		Condensed Consolidated Balance Sheets — June 30, 2001 and December 31, 2000

		Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2001 and 2000

		Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2001 and 2000

		Notes to Condensed Consolidated Financial Statements

	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

	Item 3. Quantitative and Qualitative Disclosures About Market Risk

Part II. Other Information

	Item 1. Legal Proceedings

	Item 4. Submission of Matters to a Vote of Security Holders

	Item 5. Other Information

	Item 6. Exhibits and Reports on Form 8-K

Signature

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

					June 30, 2001			December 31, 2000

					(unaudited)			*
ASSETS

Current assets:
	Cash and cash equivalents				$	5,456		$	4,280
	Accounts receivable, net				8,354			11,562
	Prepaid and other current assets				927			1,091

			Total current assets		14,737			16,933

	Property and equipment, net				3,617			4,155
	Other assets				-			21
	Goodwill				1,155			1,393

			Total assets		$	19,509		$	22,502


LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
	Short-term debt				$	69		$	1,324
	Current portion of capital lease obligations				67			63
	Accounts payable				1,288			688
	Accrued liabilities				3,070			3,253
	Deferred revenue				5,759			3,742

		Total current liabilities			10,253			9,070

Long-term liabilities, net of current portion:
	Deferred revenue				57			171
	Capital lease obligations				6			40

.		Total liabilities			10,316			9,281

Shareholders' equity:
	Preferred stock				4,912			4,912
	Common stock				52,237			51,968
	Accumulated deficit				(48,065		)	(43,771		)
	Cumulative other comprehensive income				109			112

			Total shareholders' equity		9,193			13,221

.
				Total liabilities and shareholders’ equity	$	19,509		$	22,502

* Derived from audited financial statements

The accompanying notes are an integral part of these condensed consolidated financial statements

VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)

			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2001			2000			2001			2000

Revenue:
	License		$	2,098		$	4,386		$	3,704		$	9,107
	Services		6,115			2,419			9,723			4,202

		Total revenue	8,213			6,805			13,427			13,309


Cost of revenue:
	License		316			94			677			208
	Services		3,843			1,031			6,652			2,090

		Total cost of revenue	4,159			1,125			7,329			2,298


Gross profit			4,054			5,680			6,098			11,011


Operating expenses:
	Marketing and sales		2,233			2,372			5,010			4,475
	Research and development		1,659			1,419			3,357			3,093
	General and administrative		700			930			1,557			1,847
	Amortization of goodwill		122			125			245			251
	Non-cash stock compensation		22			-			22			-

		Total operating expenses	4,736			4,846			10,191			9,666


Income (loss) from operations			(682		)	834			(4,093		)	1,345

	Other expense, net		(12		)	(120		)	(139		)	(168		)


Income (loss) before provision for taxes			(694		)	714			(4,232		)	1,177

	Provision for taxes		12			14			59			33


Net income (loss)			$	(706	)	$	700		$	(4,291	)	$	1,144



Basic net income (loss) per share			$	(0.06	)	$	0.06		$	(0.36	)	$	0.10

Diluted net income (loss) per share			$	(0.06	)	$	0.05		$	(0.36	)	$	0.07


Basic weighted average common shares and common equivalent shares			11,993			11,253			11,963			11,056

Diluted weighted average common shares and common equivalent shares			11,993			15,166			11,963			15,365

The accompanying notes are an integral part of these condensed consolidated financial statements.

VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

					Six Months Ended
					June 30,

					2001			2000

CASH FLOWS FROM OPERATING ACTIVITIES
	Net income (loss)				$	(4,291	)	$	1,144
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Depreciation and amortization			994			1,222
		Provision for doubtful accounts			(49		)	17
		Changes in operating assets and liabilities:
			Accounts receivable		3,257			(2,009		)
			Prepaid and other current assets		164			165
			Other assets		21			131
			Accounts payable		600			(104		)
			Accrued liabilities		(183		)	(529		)
			Deferred revenue		1,903			29

				Net cash provided by operating activities	2,416			66


CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property and equipment				(218		)	(370		)

			Net cash used in investing activities		(218		)	(370		)


CASH FLOWS FROM FINANCING ACTIVITIES:
	Net proceeds from sale of common stock				269			1,114
	Principal payments under capital lease obligations				(33		)	(227		)
	Principal payments of short-term note and bank debt				(1,255		)	(1,865		)

			Net cash used in financing activities		(1,019		)	(978		)


Effect of exchange rate changes on cash					(3		)	(26		)


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS					1,176			(1,308		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					4,280			3,663

CASH AND CASH EQUIVALENTS AT END OF PERIOD					$	5,456		$	2,355




SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
			Interest		$	19		$	28
			Foreign withholding and state income taxes		-			2

The accompanying notes are an integral part of these condensed consolidated financial statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

1. Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by Versant Corporation ("Versant" or the "Company"), without audit, pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements and the notes thereto should be read in conjunction with the Company's audited financial statements included in the Company's Form 10-K for the year ended December 31, 2000. The unaudited information has been prepared on the same basis as the annual financial statements and, in the opinion of the Company's management, reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2001, or any other future period.

2. Organization, Operations and Liquidity

Versant Corporation was incorporated in California in August 1988. References to the "Company" in these Notes to Condensed 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, dependence on international operations, foreign currency fluctuations, product concentration and the ability to adequately finance its ongoing operations.

To date, the Company has not achieved business volume sufficient to restore consistent positive cash flow on a quarterly basis. The Company reported a net loss of $706,000 for the second quarter of 2001 and $4.3 million for the six month period ended June 30, 2001. The Company generated a net income of $1.9 million for the year ended December 31, 2000 and a net loss of $1.7 million for the year ended December 31, 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.

3. Summary of Significant Accounting Policies

Revenue Recognition

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 in the fourth quarter of 2000. The adoption of SAB 101 did not have a material impact on the Company's consolidated results of operations or financial position.

The Company adopted the provisions of Statement of Position (SOP) 97-2, "Software Revenue Recognition" and (SOP) 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions." Revenue consists mainly of revenue earned under software license agreements, maintenance arrangements and consulting and training activities.

Revenue from perpetual software license agreements is recognized upon contract execution, provided all shipment obligations have been met, fees are fixed or determinable, and collection is probable. The Company uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date if evidence of the fair value of all undelivered elements exists. If an undelivered element of the arrangement exists under the license arrangement, revenue is deferred based on vendor-specific objective evidence of the fair value of the undelivered element. If vendor-specific objective evidence of fair value does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.

Revenue from annual maintenance and support arrangements are deferred and recognized ratably over the term of the contract. Revenue from consulting and training are recognized when the services are performed and collection is deemed probable.

For the quarter ended June 30, 2001, there were two customers that each contributed over 10% of quarterly revenues.

Cost of license revenue consists primarily of product royalty obligations, bad debt reserves, user manuals, product media and packaging and to a lower extent, production labor and freight costs.

Cost of services revenue consists principally of personnel costs (both employee and sub-contractors) associated with providing consulting, training and technical support work paid for by customers.

Comprehensive Income (Loss)

Comprehensive income (loss) includes unrealized gains and losses on foreign currency translation gains and losses that have been excluded from net income (loss) and reflected instead in shareholders’ equity. For the periods presented, comprehensive income (loss) is calculated as follows (in thousands):

	Three Months Ended					Six Months Ended
	June 30,					June 30,

	2001			2000		2001			2000


Net income (loss)	$	(706	)	$	700	$	(4,291	)	$	1,144
Foreign currency translation adjustment	(45		)	82		(172		)	(26		)

Comprehensive income (loss)	$	(751	)	$	782	$	(4,463	)	$	1,118

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 other shares. 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 anti-dilutive.

The total number of options and warrants excluded from the diluted net loss per share computation for the three and six months ended June 30, 2001 were as follows (in thousands):

	Three Months Ended			Six Months Ended
	June 30,			June 30,

	2001		2000	2001		2000


Common shares issuable upon exercise of stock options	(572	)	276	(224	)	348
Common shares issuable upon exercise of warrants for common stock	-		1,010	179		1,157
Common shares issuable upon exercise of warrants for preferred stock	2,627		2,627	2,627		2,804

	2,055		3,913	2,582		4,309

The reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations is as follows (in thousands, except per share amounts):

			Income (Numerator)			Shares (Denominator)	Per Share Amount

FOR THE THREE MONTHS ENDED JUNE 30, 2000:
	Basic and diluted net income per share:
		Income attributable to holders of common stock	$	700		11,253	$	.06


		Common shares issuable upon exercise of stock options	-			276	-
		Common shares issuable upon exercise of warrants for common stock	-			1,010	-
		Common shares issuable upon exercise of warrants for preferred stock	-			2,627	-
	Diluted net income per share:
		Income attributable to holders of common stock	$	700		15,166	$	.05


FOR THE THREE MONTHS ENDED JUNE 30, 2001:
	Basic and diluted net loss per share:
		Losses attributable to holders of common stock	$	(706	)	11,993	$	(0.06	)

FOR THE SIX MONTHS ENDED JUNE 30, 2000:
	Basic and diluted net income per share:
		Income attributable to holders of common stock	$	1,144		11,056	$	.10


		Common shares issuable upon exercise of stock options	-			348	-
		Common shares issuable upon exercise of warrants for common stock	-			1,157	-
		Common shares issuable upon exercise of warrants for preferred stock	-			2,804	-
	Diluted net income per share:
		Income attributable to holders of common stock	$	1,144		15,365	$	.07


FOR THE SIX MONTHS ENDED JUNE 30, 2001:
	Basic and diluted net loss per share:
		Losses attributable to holders of common stock	$	(4,291	)	11,963	$	(0.36	)

5. 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, geographic areas and major customers. 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: licensing, maintenance and support and consulting and 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 upon which it assesses financial performance and allocates resources.

The licensing line of business licenses object oriented database management software (Versant Developer Suite (VDS) and enJin). Versant software enables users to create, store, retrieve and modify the various types of data stored in a computer system. The maintenance and support line of business provides customers with a wide range of support services that include on-site, 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 them in evaluating, installing and customizing Versant's software, 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.

	The table below presents a summary of operating segments (in thousands):

			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2001			2000			2001			2000

Revenues from Unaffiliated Customers
	License		$	2,098		$	4,386		$	3,704		$	9,107
	Maintenance and Support		2,222			1,498			3,437			2,704
	Consulting and Training		3,893			921			6,286			1,498

		Total Revenue	$	8,213		$	6,805		$	13,427		$	13,309

Gross Margin
	License		$	1,782		$	4,292		$	3,027		$	8,899
	Maintenance and Support		1,896			1,131			2,658			1,885
	Consulting and Training		376			257			413			227

		Total Gross Margin	4,054			5,680			6,098			11,011

Profit Reconciliation:
	Other Operating Expenses		4,736			4,846			10,191			9,666
	Other Income (Expense)		(12		)	(120		)	(139		)	(168		)

		Income (Loss) Before Provision for Income Taxes	$	(694	)	$	714		$	(4,232	)	$	1,177

The table below presents the Company’s revenues by legal subsidiary (in thousands):

			Three Months Ended				Six Months Ended
			June 30,				June 30,

			2001		2000		2001		2000

Total Revenues Attributable To:
	United States/Canada		$	6,327	$	4,523	$	9,859	$	8,282
	Germany		731		774		1,180		1,288
	France		244		574		560		1,028
	United Kingdom		764		639		1,375		2,182
	Australia/Asia Pacific		147		295		453		529

		Total	$	8,213	$	6,805	$	13,427	$	13,309

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of accounts receivable. For the period ended June 30, 2001 there were two customers that had an outstanding balance that represented 28.7% and 10.9% of total accounts receivable. The Company performs periodic credit evaluation of its customers' financial condition. 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.

6. Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, (“SFAS 142”), “Goodwill and Intangible Assets,” which supersedes APB Opinion No. 17, “Intangible Assets”. Under this statement, goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually using the fair value approach, except in certain circumstances, and if there is an impairment indicator; other intangible assets will continue to be valued and amortized over their estimated lives; in-process research and development will continue to be written off immediately; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; and effective January 1, 2002, existing goodwill will no longer be subject to amortization. Goodwill arising between June 29, 2001 and December 31, 2001 will not be subject to amortization.

Upon adoption of SFAS 142, on January 1, 2002, the Company will no longer amortize goodwill, thereby eliminating annual goodwill amortization of approximately $490,000 based on anticipated amortization for 2002. Goodwill amortization for the six months ended June 30, 2001 was approximately $245,000.

In July 2001, the FASB also issued SFAS No. 141 (“SFAS 141”), “Business Combinations,” which supersedes Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations”. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and modifies the application of the purchase accounting method. The elimination of the pooling-of-interests method is effective for transactions initiated after June 30, 2001. The remaining provisions of SFAS 141 will be effective for transactions accounted for using the purchase method that are completed after June 30, 2001. The Company believes that the adoption of this Statement will not have a material impact on the financial position or the results of operations of the Company.

7. Term Loan and Line of Credit

The Company secured a revolving credit line on June 28, 2001 that expires on May 15, 2002. The maximum amount that can be borrowed under the line is $5.0 million. As of June 30, 2001, there were no borrowings under this line. Borrowings under the line would be limited to 80% of eligible accounts receivable and secured by substantially all of the Company’s assets. Borrowings would bear interest at prime rate as published in the Wall Street Journal plus 2.0%.

8. Legal Proceedings

The Company and certain of the Company's 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, on January 26, 1998, February 5, 1998, March 11, 1998 and March 18, 1998. On June 19, 1998, a Consolidated Amended Complaint was filed by the court-appointed lead Plaintiff. On May 22, 2000, the court granted the defendants' motion to dismiss the Consolidated Amended Complaint, permitting plaintiffs leave to amend. Plaintiffs filed a Second Amended Complaint on July 7, 2000. The court granted the defendant’s motion to dismiss the Second Amended Complaint on April 2, 2001, permitting plaintiff’s leave to amend. Plaintiff’s filed a Third Amended Complaint on May 10, 2001. Like its predecessors, the Third 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 and the Company's financial performance. The Third Amended Complaint seeks an unspecified amount of damages. The Company vigorously denies the plaintiffs' claims and has filed a motion to dismiss the Third Amended Complaint. 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.

On January 7, 2000, the Company gave 30 days' written notice to Buzzeo, Inc., one of the Company's customers, informing Buzzeo, Inc. that it was in default of a promissory note in favor of Versant dated January 13, 1999 and a Value Added Reseller Agreement between the parties dated June 27, 1997 (the “Reseller Agreement”). The Company also demanded final payment of the promissory note in the amount of $762,966.56 and informed Buzzeo Inc. of the Company's intention to pursue legal action in the event of non-payment. On February 2, 2000, Buzzeo, Inc. filed a complaint in the United States District Court for the District of Arizona against the Company seeking damages based on an alleged breach of contract, implied covenant of good faith and fair dealing and the warranty under the Reseller Agreement, plus interest and costs. On February 24, 2000, the Company filed a motion to dismiss. On February 28, 2000, the Company filed an answer and counterclaim seeking payment under the promissory note and the Reseller Agreement, of $715,309.44 plus interest and costs. On March 28, 2000, the Company filed a motion for summary judgment on both the counterclaim and the complaint. On August 16, 2000, the court denied the motion to dismiss, finding the argument more appropriately addressed in the context of the motion for summary judgment. On March 19, 2001, the court granted the motion for summary judgment as to liability only on the promissory note and denied the motion as to the amount due under the promissory note and in all other respects. On May 9, 2001 Buzzeo, Inc. made an offer to settle the legal action consistent with Versant’s counterclaim. Versant accepted such offer and on May 22, 2001 filed a judgment in Versant’s favor for the full amount of the promissory note plus interest.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements within the meaning of the Securities Exchange Act of 1934 that reflect our current views with respect to future events and financial performance. We have identified, with a preceding asterisk, various sentences within this Form 10-Q that contain these forward-looking statements and words such as “believe,” “anticipate,” “expect,” “intend” and similar expressions are also intended to identify forward-looking statements, but neither the asterisks nor these words are the exclusive means of identifying these statements. The forward-looking statements included in this Form 10-Q involve numerous risks and uncertainties that may cause actual results to differ materially from these forward-looking statements. These risks and uncertainties are described throughout this Form 10-Q, including under “Revenues” and “Risk Factors” within this Item 2, and in our December 31, 2000 Form 10-K on file with the Securities and Exchange Commission, especially the section labeled “Risk Factors.”

Overview

We were incorporated in August 1988 and commenced commercial shipments of our principal product, the Versant Developer Suite (VDS) formerly ODBMS, in 1991. Today, we design, develop, market and support object management systems, including database management systems, data replication and middle-tier persistence for distributed computing environments such as the growing e-business marketplace. In 2000, we focused on revenue growth in and marketing emphasis on our new e-business product suite, Versant enJin, and growth of our consulting and other services programs. Substantially all of our revenue has been derived from:

	(1)	sales of licenses for VDS and enJin;
	(2)	related maintenance and support, training, consulting and nonrecurring engineering fees received in connection with providing services associated with VDS and enJin;
	(3)	sales of peripheral products for VDS and enJin; and
	(4)	consulting, training, and the resale of licenses for third-party products that complement VDS and enJin.

To assist users in developing and deploying applications based on VDS and Versant enJin, we offer a variety of services, including consulting, training and technical support. We also offer a dedicated consulting practice for IBM WebSphere customers. Under an agreement signed in late 2000, we allocate certain of our consultants to IBM and IBM sales representatives sell these consultants’ services. *We believe that our services programs, including the IBM program, will help to generate incremental product revenue, especially from the sale of Versant enJin.

Our core product is VDS, a sixth generation object database management system that combines native support for object-oriented languages with high performance database functionality and a client-server architecture. VDS enables users to store, manage and distribute information that we believe often cannot be supported effectively by traditional database technologies, including information of the following types:

	(1)	abstract data, such as graphics, images, video, audio and unstructured text;
	(2)	dynamic, highly interrelated data, such as network management data and advanced financial instruments; and
	(3)	distributed, rapidly changing content in Internet-based applications.

VDS is also the foundation for Versant’s e-business product suite called Versant enJin. Versant enJin is a Java development and runtime platform that provides Enterprise Java Bean (EJB) compliant application server integration for both IBM WebSphere and BEA WebLogic in order to accelerate Internet transactions. In 2000, we began to offer VDS and Versant enJin as product suites, bundling together what had been separate existing components. The major reason for the bundling was to simplify installation of the product and help customers deploy new applications more quickly. For both product suites, the components include object-oriented programming language interfaces such as C++ and Java, XML (eXtended Markup Language) import and export capability, and asynchronous replication for distributed environments. For Versant enJin, Versant also bundles EJB integration with IBM WebSphere and BEA WebLogic and synchronization to update the back-end database system automatically.

*Our future performance will depend in significant part on the continued growth of the e-business market and its dependence on highly scalable, high performance and reliable object-based technologies such as ours. *The failure of our products to perform favorably in and become an accepted component of this market, or a slower than expected increase or a decrease in the volume of sales of our products and services to this same market, could have a material adverse effect on us.

We license our products directly to end-users primarily through four types of licenses—development licenses, deployment server licenses, deployment client licenses and project licenses (which include development and deployment licenses)—and secondarily through test licenses, high availability licenses and fault tolerant server licenses. Development licenses are sold on a per seat basis and authorize a customer to develop an application program that uses VDS or Versant enJin. Before that 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 VDS and Versant enJin 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 sublicense deployment copies of VDS or Versant enJin, 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 on 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 perpetual license agreements is recognized upon shipment of the software provided that there is no significant modification of the software, payment is due within our normal payment terms, the fee is fixed and determinable 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 deferred and recognized ratably over the term of the maintenance contract, which is typically twelve months. Training and consulting revenue is recognized when a customer's purchase order has been received, the services have been performed and collection is deemed probable.

We license VDS, Versant enJin and peripheral products and sell associated services primarily through our direct sales force to end-user customers and value-added resellers.

Worldwide headcount as of June 30, 2001 was 151 compared to 123 as of June 30, 2000.

Results of Operations

The following table sets forth the percentages that income statement items compare to total revenue for the three and six months ended June 30, 2001 and 2000:

						Three Months Ended June 30,				Six Months Ended June 30,

						2001		2000		2001		2000

Revenue:
		License				25.5	%	64.5	%	27.6	%	68.4	%
		Services				74.5	%	35.5	%	72.4	%	31.6	%

					Total revenue	100.0	%	100.0	%	100.0	%	100.0	%

Cost of revenue:
		License				3.8	%	1.4	%	5.0	%	1.6	%
		Services				46.8	%	15.1	%	49.5	%	15.7	%

				Total cost of revenue		50.6	%	16.5	%	54.5	%	17.3	%

Gross profit						49.4	%	83.5	%	45.5	%	82.7	%

Operating expenses:
	Marketing and sales					27.2	%	34.9	%	37.3	%	33.6	%
	Research and development					20.2	%	20.9	%	25.0	%	23.2	%
	General and administrative					8.5	%	13.6	%	11.6	%	13.9	%
	Amortization of goodwill					1.5	%	1.8	%	1.8	%	1.9	%
	Non-cash stock compensation					.3	%	-		.3	%	-

			Total operating expenses			57.7	%	71.2	%	76.0	%	72.6	%

Income (loss) from operations						(8.3	)%	12.3	%	(30.5	)%	10.1	%

	Other expense, net					(0.2	)%	(1.8	)%	(1.0	)%	(1.3	)%


Income (loss) before provision for taxes						(8.5	)%	10.5	%	(31.5	)%	8.8	%

	Provision for taxes					0.1	%	.2	%	0.5	%	0.2	%


Net income (loss)						(8.6	)%	10.3	%	(32.0	)%	8.6	%

Revenue

Total consolidated revenue increased 21% from $6.8 million in the second quarter of 2000 to $8.2 million in the second quarter of 2001and increased 1% from $13.3 million in the six months ended June 30, 2000 to $13.4 million in the six months ended June 30, 2001. Record quarterly services revenues offset the decline in our license revenues due to the continuing economic slowdown in our core markets. “E-business” revenue was 51% of total revenue in the second quarter of 2001. *Despite first quarter performance, we remain optimistic about maintaining our services business level and second half 2001 growth in enJin product sales, and we expect overall revenue growth from 2000 to 2001 to be in the range of 8% to 12%.

License revenue

License revenue decreased 52% from $4.4 million in the second quarter of 2000 to $2.1 million in the second quarter of 2001 and decreased 59% from $9.1 million in the six months ended June 2000 to $3.7 million in the six months ended June 2001. The decrease from 2000 was primarily the result of customers’ decisions to delay software development projects, due in large part to the continuing economic downtrend experienced in our core markets (especially telecommunications) during the first half of 2001. License revenue decreased in the second quarter of 2001 to 25% of total revenue from 64% in the second quarter of 2000. *We expect license revenue to represent between 40% to 50% of total 2001 revenues, a decrease over total year 2000 due to lower than expected license revenue from our core markets over the first six months of 2001 and to our plans to grow the consulting organization.

Services revenue

Services revenue increased 153% from $2.4 million in the second quarter of 2000 to $6.1 million in the second quarter of 2001 and increased 131% from $4.2 million in the six months ended June 30, 2000 to $9.7 million in the six months ended June 30, 2001. This increase was due to the continued concentration on consulting revenues through our in-house consulting organization as well as sub-contracted partners. Services revenue increased to 75% of total revenue in the second quarter of 2001 compared to 36% of total revenue in the second quarter of 2000. *We expect service revenue to represent between 50% and 60% of total 2001 revenue due to the factors outlined under "License revenue" above.

International sales

International sales are based on the country in which the revenue is derived. International revenue decreased by 17% to $1.9 million in the second quarter of 2001, from $2.3 million in the second quarter of 2000 and decreased 29% to $3.6 million in the six months ended June 30, 2001, from $5.0 million in the six months ended June 30, 2000. These decreases resulted primarily from lower license sales due to the economic conditions in our core markets alluded to above. The impact of this downturn affected international sales more than domestic sales and as a result international revenue as a percentage of total revenue decreased from 33.5% in the second quarter of 2000 to 23.0% in the second quarter of 2001. *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 increased revenue is achieved. *We expect international revenue to remain a significant percentage of total revenue.

Cost of Revenue and Gross Profit

Total cost of revenue increased to $4.1 million in the second quarter of 2001 from $1.1 million in the second quarter of 2000 and increased to $7.3 million in the six months ended June 30, 2001 from $2.3 million in the same period for 2000. These increases were mainly due to the predominance of services revenue in the overall revenue mix for the three months and the six months ended June 30, 2001. Total cost of revenue as a percentage of total revenue increased to 50.6% in the second quarter of 2001 from 16.5% in the second quarter of 2000 and from 54.5% in the six months ended June 30, 2001 from 17.3% in the six months ended June 30, 2000.

Cost of license revenue consists primarily of product royalty obligations, bad debt reserves, user manuals, product media and packaging and to a lesser extent, production labor and freight costs. Cost of license revenue increased to $316,000 in the second quarter of 2001 compared to $94,000 in the second quarter of 2000. This increase was primarily the result of amortizing product royalty costs incurred with the release of enJin. As a result of these increased costs together with a lower license revenue base, cost of license revenue as a percentage of license revenue increased to 15.1% in the second quarter of 2001 from 2.1% in the second quarter of 2000 and increased to 18.3% in the six months ended June 30, 2001 from 2.3% in the six months ended June 30, 2000.

Cost of services revenue consists principally of personnel costs (both employee and sub-contractors) associated with providing consulting, training and technical support work paid for by customers. Cost of services revenue increased to $3.8 million in the second quarter of 2001 from $1.0 million in the second quarter of 2000 and increased to $6.7 million in the six months ended June 30, 2001 from $2.1 million for the same period in 2000. The increase in service costs is attributable to the hiring and labor costs of our internal consulting organization and payments to our partners for sub-contracted engagements. Cost of service revenue as a percentage of service revenue increased to 62.8% in the second quarter of 2001 from 42.6% in second quarter of 2000 and increased to 68.4% in the six months ended June 30, 2001 from 49.7% in the same period for 2000 due to the higher concentration of consulting revenues in the overall services mix in 2001. *We expect our cost of services revenue for 2001 to be higher than 2000, both in absolute dollars and as a percentage of services revenue, through headcount and supporting expense increases. *This increase is necessary to support our projected increases in service revenues and to support our increasing efforts in the consulting business, which we intend to expand in 2001. *We believe that the increases in our e-business initiatives 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 additional personnel to implement new e-business applications.

Marketing and Sales Expenses

Marketing and sales expenses consist primarily of marketing and sales labor costs, including sales commissions, travel, sales offices, product descriptive literature, seminars, trade shows, advertising, product management, depreciation, occupancy expense, lead generation and mailings. Marketing and sales expense decreased in the second quarter of 2001 to $2.2 million from $2.4 million in the second quarter of 2000. This decrease is the result of lower marketing program costs in the second quarter of 2001. Marketing and sales expense increased to $5.0 million in the six months ended June 30, 2001 from $4.5 million in the six months ended June 30, 2000. This increase was primarily the result of increased headcount. *We expect marketing and sales expenses for 2001 to be at similar levels to 2000 in absolute dollar terms but to decline as a percent of total revenue, due to ongoing efforts to market our products to new business markets. *However, if we maintain our marketing and sales expenditures without corresponding increases in revenue, our results of operations would be adversely affected. As a percentage of total revenue, marketing and sales expenses decreased to 27.2% in the second quarter of 2001 from 34.9% in the second quarter of 2000 mainly due to increased revenue and increased to 37.3% for the six months ended June 30, 2001 from 33.6% for the same period in 2000 mainly due to increased cost.

Research and Development Expenses

Research and development expenses consist primarily of salaries, recruiting and other personnel-related expenses, depreciation, the expensing of development equipment, occupancy expenses, travel expenses and supplies. Research and development expenses increased to $1.7 million in the second quarter of 2001 from $1.4 million in the second quarter of 2000 and increased to $3.4 million for the six months ended June 30, 2001 from $3.1 million for the same period in 2000 primarily as the result of increased headcount. *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 e-business efforts as well as ongoing improvements in our VDS and enJin products, we expect research and development expenses to increase slightly from 2000 to 2001 in absolute dollars but remain relatively constant as a percentage of total revenue. *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. As a percent of total revenue, research and development expenses decreased slightly to 20.2% in the second quarter of 2001 from 20.9% in the second quarter of 2000 mainly due to increased revenue and increased slightly to 25.0% for the six months ended June 30, 2001 from 23.2% for the same period in 2000 mainly due to increased cost.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, recruiting and other personnel-related expenses for our accounting, human resources, and general management functions. In addition, general and administrative expenses include outside legal, public relations, audit and external reporting costs. General and administrative expenses decreased to $700,000 in the second quarter of 2001 from $930,000 in the second quarter of 2000 mainly due to lower legal and accounting fees and decreased to $1.6 million for the six months ended June 30, 2001 from $1.8 million for the same period in 2000 for the same reason. *We anticipate that general and administrative expenses for 2001 will increase over 2000 in absolute terms, but decrease slightly as a percentage of total revenue. This anticipated increase in absolute dollars is due to the need to rebuild part of the administrative staff that was reduced in 1999. *However, if we increase our existing administration infrastructure without corresponding increases in revenue, our results of operations would be adversely affected. As a percentage of total revenue, general and administrative expenses decreased in the second quarter of 2001 to 8.5% from 13.6% in the first quarter of 2000 due to both increased revenue and decreased cost and decreased to 11.6% for the six months ended June 30, 2001 from 13.9% for the same period in 2000 mainly due to decreased cost.

Amortization of Goodwill

The acquisition of Versant Europe in March 1997 resulted in our recording goodwill in the amount of $3.3 million, which is being amortized over a seven-year period. 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. During the quarters ended June 30, 2001 and 2000, we amortized $46,650 and $47,100, respectively. *We will amortize approximately $93,300 of additional goodwill in 2001. See note 9 of the notes to our consolidated financial statements in our December 31, 2000 Form 10-K on file with the SEC.

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 goodwill in the amount of $1.2 million, which is being amortized over a five-year period. In November 1999, we 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 being amortized equally over the remaining goodwill period. The addition to goodwill was valued at $149,000 and will be amortized at a rate of approximately $9,900 per quarter. During quarters ended June 30, 2001 and 2000, we amortized $68,000 and $71,100 respectively. *We will amortize approximately $136,000 of additional goodwill in 2001. See note 10 of the notes to our consolidated financial statements in our December 31, 2000 Form 10-K on file with the SEC.

Recent Pronouncements

In July 2001, the FASB issued SFAS No. 142, (“SFAS 142”), “Goodwill and Intangible Assets,” which supersedes APB Opinion No. 17, “Intangible Assets”. Under this statement, goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually using the fair value approach, except in certain circumstances, and if there is an impairment indicator; other intangible assets will continue to be valued and amortized over their estimated lives; in-process research and development will continue to be written off immediately; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; and effective January 1, 2002, existing goodwill will no longer be subject to amortization. Goodwill arising between June 29, 2001 and December 31, 2001 will not be subject to amortization.

Liquidity and Capital Resources

Cash and cash equivalents increased from $4.3 million at December 31, 2000 to $5.5 million at June 30, 2001. For the six months ended June 30, 2001, our operating activities generated $2.4 million of cash and cash equivalents with our net loss being offset by non-cash depreciation and amortization, a decrease in accounts receivable and an increase in deferred revenue. Investing activities used $218,000 over the six month period for the purchase of capital equipment needed for operational activities, and financing activities used cash of $1.0 million due to the pay down of short term debt offset in part from sale of common stock.

Total assets decreased from $22.5 million at December 31, 2000 to $19.5 million at June 30, 2001 primarily due to the reduction in accounts receivable.

Total liabilities increased from $9.3 million at December 31, 2000 to $10.3 million at June 30, 2001 due to increases in deferred revenue and accounts payable offset by a reduction in short term debt.

Total shareholders’ equity decreased from $13.2 million at December 31, 2000 to $9.1 million at June 30, 2001 primarily due to the net loss.

The Company secured a revolving credit line on June 28, 2001 that expires on May 15, 2002. The maximum amount that can be borrowed under the line is $5.0 million. Borrowings under the line would be limited to 80% of eligible accounts receivable and secured by substantially all of the Company’s assets. Borrowings would bear interest at prime rate as published in the Wall Street Journal plus 2.0%.

*We believe that our current cash, cash equivalents and lines of credit, and any net cash provided by operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for 2001. At June 30, 2001 our commitments for capital expenditures were not material. 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. *The sale of additional equity or convertible debt securities could result in dilution to our shareholders. Even if we were able to obtain additional debt or equity financing, the terms of this financing may significantly restrict our business activities. *Cash may also be needed to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies and we expect that in the event of such an acquisition or investment we will need to seek additional debt or equity financing.

The actual cash resources required to successfully implement our business plan in year 2001 will depend upon numerous factors, including but not limited to those described in the following Risk Factors.

Risk Factors

This Form 10-Q contains forward-looking statements that involve risks and uncertainties, including, but not limited to, those set forth below, and those set forth in our Form 10-K for the year ended December 31, 2000 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 June 30, 2001, we had $5.5 million in cash and cash equivalents and positive working capital of approximately $4.5 million. To date, we have not achieved profitability or positive cash flow on a sustained basis. *While we believe that our current cash, cash equivalents, lines of credit, and any net cash provided by operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the remainder of 2001, 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 reduce operations substantially or to raise additional funds through debt or equity financings. From time to time, we have been in violation of covenants of our bank debt, and there can be no assurance that our bank line of credit will be available if needed. Additionally, when our line expires in May 2002, there can be no assurance it will be renewed. There can be no assurance any necessary equity or debt funding would be available to us on favorable terms, if at all. Also, 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 basis, and we expect this trend to continue. These dramatic fluctuations result from a number of factors, including:

	•	the lengthy and highly consultative sales cycle associated with our products;
	•	uncertainty regarding the timing and scope of customer deployment schedules of applications based on VDS and Versant enJin;
	•	fluctuations in domestic and foreign demand for our products and services, particularly in the e-business, telecommunications and financial services markets;
	•	the impact of new product introductions by us and our competitors;
	•	our unwillingness to lower prices significantly to meet prices set by our competitors;
	•	the effect of publications of opinions about us and our competitors and their products;
	•	customer order deferrals in anticipation of product enhancements or new product offerings by us or our competitors; and
	•	potential customers' unwillingness to invest in our products given our perceived financial instability.

A number of other factors make it impossible to predict our operating results for any period. We ship our software to a customer upon 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 have recorded most of our revenue and booked most of our orders in the third month of each quarter, with a concentration of 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 rely on our core markets, specifically the telecommunications and financial services markets, which are characterized by complexity and intense competition. Historically, we have been highly dependent upon the telecommunications industry, and we are becoming increasingly dependent upon the financial services market for sales of VDS. Our success in these areas is dependent, to a large extent, on general economic conditions, our ability to compete with alternative technology providers and whether our customers and potential customers believe we have the expertise and financial stability 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. Currently, companies in these markets are scaling back their technology expenditures significantly. The types of applications and commercial products for the telecommunications and financial services markets are continuing to develop and are rapidly changing, and the market 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 consulting expertise to implement and optimize. This requires that we maintain a highly skilled consulting practice with specific expertise in these markets. There can be no assurance that we can adequately hire and retain personnel for such practice.

We are repositioning our company to address a new marketplace. Up to now the majority of our revenue has been generated by VDS in the telecommunication and financial markets. *However, we expect that future revenue growth will be generated mainly by our Versant enJin product, which has been developed to improve the performance of application servers in e-business applications for both large-scale enterprises and for Internet-based companies such as portals, e-marketplaces and b2b vendors. Our success in this marketplace depends on the continued growth of the application server market, this market’s acceptance of Versant enJin and our ability to deliver a reliable, competitively priced product, none of which is assured.

We may not be able to manage costs given the unpredictability of our revenue. We expended significant resources in 1999 and 2000 to build our infrastructure and hire personnel, particularly in our services and sales and marketing groups. *We currently expect to continue to hire personnel during the remainder of 2001 in order to support anticipated higher revenue levels. Consequently, we will continue to incur a relatively high level of fixed expenses. If planned revenue growth does not materialize, our business, financial condition and results of operations will be materially harmed.

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 in our core business, although sales to our e-business customers are often concluded in shorter time intervals. 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 benchmarking 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.

Our customer concentration increases the potential volatility of our operating results. *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 these orders and their fulfillment has caused, and in the future is likely to cause, 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:

	•	longer receivable collection periods;
	•	changes in regulatory requirements;
	•	dependence on independent resellers;
	•	multiple and conflicting regulations and technology standards;
	•	import and export restrictions and tariffs;
	•	difficulties and costs of staffing and managing foreign operations;
	•	potentially adverse tax consequences;
	•	foreign exchange fluctuations;
	•	the burdens of complying with a variety of foreign laws;
	•	the impact of business cycles and economic instability outside the United States; and
	•	limited ability to enforce agreements, intellectual property rights and other rights in some foreign countries.

We must defend against 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, on January 26, 1998, February 5, 1998, March 11, 1998 and March 18, 1998. On June 19, 1998, a Consolidated Amended Complaint was filed by the court-appointed lead Plaintiff. On May 22, 2000, the court granted the defendants' motion to dismiss the Consolidated Amended Complaint, permitting plaintiffs leave to amend. Plaintiffs filed a Second Amended Complaint on July 7, 2000. The court granted the defendant’s motion to dismiss the Second Amended Complaint on April 2, 2001, permitting plaintiff’s leave to amend. Plaintiff’s filed a Third Amended Complaint on May 10, 2001. Like its predecessors, the Third 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 Versant and our financial performance. The Third Amended Complaint seeks an unspecified amount of damages. We vigorously deny the plaintiffs' claims and have filed a motion to dismiss the Third Amended Complaint. 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.

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 and resulted in litigation. *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 is 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 conversion of preferred shares and warrants Vertex and its' affiliates would beneficially own 4,009,428 shares of common stock. As a result, Vertex and its affiliates would own approximately 33.4% of our common stock.

Risks Related To Our Industry

We face competition in both our core business market and the e-business market. In our core business, we compete with companies offering object and relational database management systems. Object-oriented competitors include eXcelon (formerly Object Design, Inc.), Objectivity, Inc. and Poet Software Corporation. In addition, our products compete with traditional relational database management systems such as those from Oracle, Computer Associates, Sybase, Informix, IBM and Microsoft.

In the e-business market our competitors can be classified into two groups. Firstly, we compete with relational database companies, many of which have modified or are expected to modify their Relational Database Management Systems (RDBM's) to incorporate object-oriented interfaces and other functionality and which argue this object-relational functionality is an adequate solution for integration with application servers. Secondly we face competition from object-oriented companies that provide components similar to those included in our enJin product offering, for example eXcelon, Persistence Software and TopLink. In order for our products to be well accepted in this marketplace, it is important for one or more of our technical partnerships with application server vendors such as IBM and BEA to become strategic on both sides.

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. 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 our product lines, due to the uncertainty of software development projects, these expenditures will not necessarily result in successful product introductions. Uncertainties affecting 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 have developed technology that will allow Versant enJin to support BEA WebLogic, IBM WebSphere and other EJB based application servers; however, undiscovered bugs or errors may exist that prevent us from achieving the functionality we seek with such integrations. In addition, because Java Bean containers are specific to each application server vendor and no standards have been adopted for these containers, we may not be able to take advantage of our existing development work when propagating our solution for other application server vendors.

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 claim of this type, 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. Royalty or 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. Versant enJin and VDS 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, in integrating our products with their 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 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign currency hedging instruments. We transact business in various foreign currencies and, accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. To date, the effect of changes in foreign currency exchange rates on revenues and operating expenses have not been material. Operating expenses incurred by our foreign subsidiaries are denominated primarily in local currencies. We currently do not use financial instruments to hedge these operating expenses. *We intend to assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis. We do not use derivative financial instruments for speculative trading purposes.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

On January 7, 2000, the Company gave 30 days' written notice to Buzzeo, Inc., one of the Company's customers, informing Buzzeo, Inc. that it was in default of a promissory note in favor of Versant dated January 13, 1999 and a Value Added Reseller Agreement between the parties dated June 27, 1997 (the “Reseller Agreement”). The Company also demanded final payment of the promissory note in the amount of $762,966.56 and informed Buzzeo Inc. of the Company's intention to pursue legal action in the event of non-payment. On February 2, 2000, Buzzeo, Inc. filed a complaint in the United States District Court for the District of Arizona against the Company seeking damages based on an alleged breach of contract, implied covenant of good faith and fair dealing and the warranty under the Reseller Agreement, plus interest and costs. On February 24, 2000, the Company filed a motion to dismiss. On February 28, 2000, the Company filed an answer and counterclaim seeking payment under the promissory note and the Reseller Agreement, of $715,309.44 plus interest and costs. On March 28, 2000, the Company filed a motion for summary judgment on both the counterclaim and the complaint. On August 16, 2000, the court denied the motion to dismiss, finding the argument more appropriately addressed in the context of the motion for summary judgment. On March 19, 2001, the court granted the motion for summary judgment as to liability only on the promissory note and denied the motion as to the amount due under the promissory note and in all other respects. On May 9, 2001 Buzzeo, Inc. made an offer to settle the legal action consistent with Versant’s counterclaim. Versant accepted this offer and on May 22, 2001 we filed a judgment for the full amount of the promissory note plus interest.

Item 4. Submission of Matters to a Vote of Security Holders

We held our Annual Meeting of Shareholders on June 14, 2001. Following are descriptions of the matters voted on and the results of such meeting:

		Votes For	Votes Against	Votes Abstained	Votes Withheld	Broker Non-Votes

1. Election of Directors:
	David Banks	11,980,103	—	—	142,407	—
	William Henry Delevati	11,993,161	—	—	129,349	—
	Nick Ordon	11,965,811	—	—	156,699	—
	Shyam Rangole	11,995,601	—	—	126,909	—
	William R. Shellooe	11,966,653	—	—	155,857	—
	Bernhard Woebker	11,974,913	—	—	147,597	—

2. Amendments to our 1996 Equity Incentive Plan to increase the number of shares of common stock reserved for issuance under the plan by an aggregate of 1,500,000 shares.		3,774,597	556,071	625,819	—	7,166,023

3. Amendments to our 1996 Employee Stock Purchase Plan to increase the number of shares of common stock reserved for issuance under the plan by an aggregate of 350,000 shares.		4,006,126	321,942	628,419	—	7,166,023

4. Amendments to our 1996 Directors Stock Option Plan to increase the number of shares of common stock reserved for issuance under the plan by 100,000 shares, increase the size of the initial grant to directors by 10,000 shares, and increase the size of the succeeding grants to directors by 5,000 shares.		3,843,060	472,028	641,399	—	7,166,023

5. Ratification of the appointment of Arthur Andersen LLP as our independent auditors for 2001.		12,054,241	54,895	13,374	—	—

Item 5. Other Information

On July 19, 2001, Daniel L. Roberts was elected to our Board of Directors. In connection with such election, which changed the composition of our audit and compensation committees. The new members of our audit committee are Daniel L. Roberts, William Henry Delavati and Shyam Rangole, and the new members of our compensation committee are David Banks and William Henry Delavati.

Item 6. Exhibits and Reports on Form 8-K

(a)
Exhibit No.		Exhibit Title

10.50		Business Loan Agreement (Asset Based) dated June 28, 2001 by and between the registrant and Greater Bay Bank.
10.51		Commercial Security Agreement dated June 28, 2001 by and between the registrant and Greater Bay Bank.


(b)		No reports on From 8-K were filed during the quarter ended June 30, 2001.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	VERSANT CORPORATION
Date: August 13, 2001	/s/ Lee McGrath

	Lee McGrath
	Vice President Finance and Administration.
	Chief Financial Officer, Treasurer and Secretary
	(Duly Authorized Officer and Principal
	Financial Officer)

EXHIBIT INDEX

EXHIBIT EXHIBIT TITLE
NUMBER

10.50 — Business Loan Agreement (Asset Based) dated June 28, 2001 by and between the registrant and Greater Bay Bank.
10.51 — Commercial Security Agreement dated June 28, 2001 by and between the registrant and Greater Bay Bank.

EX-10.50 3 j1181_ex10d50.htm EX-10.50 Prepared by MerrillDirect

BUSINESS LOAN AGREEMENT (ASSET BASED)

Principal $5,000,000.00	Loan Date 06-28-2001		Maturity 05-15-2002	Loan No 530037155	Call / Coll 2000		Account		Officer 602	Initials
References in the shaded area for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containg "***" has been omittted due to text length limitations.

Borrower:		Versant Corporation 6539 Dumbarton Circle Freemont, CA 94555				Lender:		Greater Bay Bank A Division of Mid-Peninsula Bank 39470 Paseo Padre Parkway Fremont, CA 94538

THIS BUSINESS LOAN AGREEMENT (ASSET BASED) dated June 28, 2001, is made and executed between Versant Corporation ("Borrower") and Greater Bay Bank ("Lender") on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement ("Loan"). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements as set forth in this Agreement, and (B) all such Loans shall be and remain subject to the terms and conditions of this Agreement.

TERM. This Agreement shall be effective as of June 28, 2001, and shall continue in full force and effect until such time as all of Borrower's Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys' fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement.

LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows:

Conditions Precedent to Each Advance. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender:

	(1)	Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized,
		executed, and delivered by Borrower to Lender.

	(2)	Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request.

	(3)	The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect.

	(4)	All guaranties required by Lender for the credit facility(ies) shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect.

	(5)	Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower's Accounts, books, records, and operations, and Lender shall be satisfied as to their condition.

	(6)	Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable.

	(7)	There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate."

Making Loan Advances. Advances under this credit facility, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit ' of Borrower (1) when credited to any deposit account of Borrower maintained with Lender or (2) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day.

Mandatory Loan Repayments. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid.

Loan Account. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect.

COLLATERAL. To secure payment of the Primary Credit Facility and performance of all other Loan, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require. Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender:

Perfection of Security Interests. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and Lender will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity.

Collateral Records. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. Records related to Accounts (Receivables) are or will be located at 6539 Dumbarton Circle, Fremont, CA 94555. The above is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower's collateral.

Collateral Schedules. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts and schedules of Eligible Accounts in form and substance satisfactory to the Lender. Thereafter supplemental schedules shall be delivered according to the following schedule: With respect to Eligible Accounts, schedules shall be delivered as follows: Monthly accounts receivable and accounts payable agings within fifteen (15) days of month end with Borrowing Base Certificate.

Representations and Warranties Concerning Accounts. With respect to the Accounts, Borrower represents and warrants to Lender: (1) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (2) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (3) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts.

Remittance Account. Borrower agrees that Lender may at any time require Borrower to institute procedures whereby the payments and other proceeds of the Accounts shall be paid by the Account Debtors under a remittance account or lock box arrangement with Lender, or Lender's agent, or with one or more financial institutions designated by Lender. Borrower further agrees that, if no Event of Default exists under this Agreement, any and all of such funds received under such a remittance account or lock box arrangement shall, at Lender's sole election and discretion, either be (1) paid or turned over to Borrower; (2) deposited into one or more accounts for the benefit of Borrower (which deposit accounts shall be subject to a security assignment in favor of Lender); (3) deposited into one or more accounts for the joint benefit of Borrower and Lender (which deposit accounts shall likewise be subject to a security assignment in favor of Lender); (4) paid or turned over to Lender to be applied to the Indebtedness in such order and priority as Lender may determine within its sole discretion; or (5) any combination of the foregoing as Lender shall determine from time to time. Borrower further agrees that, should one or more Events of Default exist, any and all funds received under such a remittance account or lock box arrangement shall be paid or turned over to Lender to be applied to the Indebtedness, again in such order and priority as Lender may determine within its sole discretion.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents.

Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements perfecting Lender's Security Interests; (4) evidence of insurance as required below; (5) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender's counsel.

Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.

Fees and Expenses Under This Agreement. Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable.

Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.

No Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of California. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreigncorporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 6539 Dumbarton Circle Fremont, CA 94555. Unless Borrower has designated otherwise in writing, the principle office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender of any change in the location of Borrower's principle office. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower's business activities.

Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None.

Authorization. Borrower's execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower's articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower's properties.

Financial Information. Each of Borrower's financial statements supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.

Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.

Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements Or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years.

Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower's ownership of Borrower's Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on. under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.

Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.

Taxes. To the best of Borrower's knowledge, all of Borrower's tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral.

Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower's financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.

Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times.

Financial Statements. Furnish Lender with the following:

Annual Statements. As soon as available, but in no event later than ninety (90) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.

Interim Statements. As soon as available, but in no event later than 15 days after the end of each month, Borrower's balance sheet and profit and loss statement for the period ended, prepared by Borrower.

Tax Returns. As soon as available, but in no event later than thirty (30) days after the applicable filing date for* the tax reporting period ended, Federal and other governmental tax returns, prepared by Borrower.

All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.

Additional Information. Furnish such additional information and statements, as Lender may request from time to time.

Financial Covenants and Ratios. Comply with the following covenants and ratios:

Working Capital Requirements. Borrower shall comply with the following working capital ratio requirements:

Quick Ratio. Maintain a Quick Ratio in excess of 1.300 to 1.000.

Minimum Income and Cash flow Requirements. Maintain not less than the following Minimum Net Income level: Maintain a minimum quarterly Net Profit Before Interest, Income and Franchise Taxes, Depreciation, amortization and Depletion Expenses plus other Noncash Charges-Extraordinary Income (Gains/Losses) beginning September 30, 2001.

Tangible Net Worth Requirements. Maintain a minimum Tangible Net Worth of not less than: $6,500,000.00.

Other Requirements. Borrower agrees to provide to Lender 10K report annually within ninety (90) days and 10Q report within forty five (45) days of quarter end.

Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct.

Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender's loss payable or other endorsements as Lender may require.

Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.

Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing.

Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits.

Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.

Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner.

Environmental Studies. Promptly conduct and complete, at Borrower's expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, [eased or used by Borrower.

Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower's properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender's sole opinion, Lender's interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender's interest.

Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense.

Compliance Certificates. Unless waived in writing by Lender, provide Lender within fifteen (15) days after the end of each month, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement.

Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower's part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.

Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.

RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (A) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (B) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (C) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error.

LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:

Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower's accounts, except to Lender.

Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower's stock, or purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure.

Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender.

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

Payment Default. Borrower fails to make any payment when due under the Loan.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's or any Grantor's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement, the Note, or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default.

Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.

Right to Cure. If any default, other than a default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (1) cure the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiate steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies.

ACCOUNTS RECEIVABLE AUDITS. Audits of accounts receivable may be conducted annually and within forty five (45) days of documentation or prior to initial line advance, or at such frequency as Lender shall require. It is agreed that Lender will be reimbursed for the costs of any such audits .

ADDITIONAL FINANCIAL REPORTING. Borrower to provide Lender with 1 O-K report annually within ninety (90) days and 1 O-Q report quarterly within forty five (45) days.

DEPOSIT RELATIONSHIP. Borrower agrees that until such time as Borrower is no longer subject to the terms of any credit agreement(s) with Lender, the primary deposit account(s) maintained by Borrower will be placed with Lender, or a bank affiliated with Lender.

EXHIBIT A. Exhibit A is attached to this Agreement, and by this reference is made a part of this Agreement just as if all the provisions, terms and conditions of the Exhibit had been fully set forth in this Agreement.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys' Fees; Expenses. Borrower agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of California. This Agreement has been accepted by Lender in the State of California.

Choice of Venue. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Alameda County, State of California.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the Part of Lender in exercising any right shall operate as a waive r of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any of Borrower's or any Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used in this Agreement shall include all of Borrower's subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower's subsidiaries or affiliates.

Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower's rights under this Agreement or any interest therein, without the prior written consent of Lender.

Survival of Representations and Warranties. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:

Account. The word "Account" means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender).

Advance. The word "Advance" means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf under the terms and conditions of this Agreement.

Agreement. The word "Agreement" means this Business Loan Agreement (Asset Based), as this Business Loan Agreement (Asset Based) may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement (Asset Based) from time to time.

Borrower. The word "Borrower" means Versant Corporation, and all other persons and entities signing the Note in whatever capacity.

Borrowing Base. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of (1) $5,000,000.00 or (2) 80.000% of the aggregate amount of Eligible Accounts (not to exceed in corresponding Loan amount based on Eligible Accounts $5,000,000.00).

Business Day. The words "Business Day" mean a day on which commercial banks are open in the State of California.

Cash & Equivalent. The words "Cash & Equivalent" mean all of Borrower's cash, marketable securities, and other near-cash items, excluding sinking funds.

Collateral. The word "Collateral" means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The -word Collateral also includes without limitation all collateral described in the Collateral section of this Agreement.

Eligible Accounts. The words "Eligible Accounts" mean at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include:

(1) Accounts with respect to which the Account Debtor is employee or agent of Borrower.

(2) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with Borrower or its shareholders, officers, or directors.

(3) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional.

(4) Accounts with respect to which the Account Debtor is not a resident of the United States, except to the extent such Accounts are supported by insurance, bonds or other assurances satisfactory to Lender.

(5) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower.

(6) Accounts which are subject to dispute, counterclaim, or setoff.

(7) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor.

(8) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory.

(9) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due.

(10) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States.

(11) Accounts which have not been paid in full within 90 days from the invoice date. The entire balance of any Account of any single Account Debtor will be ineligible whenever the portion of the Account which has not been paid within 90 days from the invoice date is in excess of 20.000% of the total amount outstanding on the Account.

(1 2) That portion of the Accounts of any single Account Debtor which exceeds 25.000% of all of Borrower's Accounts.

(13) C.O.D. accounts, cash accounts, noncustomer miscellaneous accounts and finance charges incurred on past due account balances.

(14) Accounts in which the borrower fails to provide Lender with requested financial information concerning the subject accounts (Although certain concentrations are examined on a case-by-case basis, Lender's standard procedure is to request D & B reports or financial statements on all potential concentrations greater than 25%.)

(15) Unbilled accounts receivable.

(16) Dated and/or extended-term accounts receivable.

(17) Refundable maintenance contract accounts receivable.

(18) Bonded accounts receivable.

(19) Retainages (amounts withheld from billing and which may not be due depending on acceptable performance or completion of a contract.)

(20) Any accounts that in the sole discretion of the Lender are considered to be ineligible for the purposes of the transaction(s) contemplated.

Environmental Laws. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement.

Expiration Date. The words "Expiration Date" mean the date of termination of Lender's commitment to lend under this Agreement.

GAAP. The word "GAAP" means generally accepted accounting principles.

Grantor. The word "Grantor" means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.

Guarantor. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Loan.

Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.

Lender. The word "Lender" means Greater Bay Bank, its successors and assigns.

Loan. The word "Loan" means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

Note. The word "Note" means the Note executed by Borrower in the principal amount of $5,000,000.00 dated June 28, 2001, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

Permitted Liens. The words "Permitted Liens" mean (1) liens and security interests securing Indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or-other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets.

Primary Credit Facility. The words "Primary Credit Facility" mean the credit facility described in the Line of Credit section of this Agreement.

Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan.

Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.

Security Interest. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise.

Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold Improvements) less total debt.

Trade Receivables. The words "Trade Receivables" mean all of Borrower's accounts from trade, net of allowance for doubtful accounts.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT (ASSET BASED) AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT (ASSET BASED) IS DATED JUNE 28, 2001

VERSANT CORPORATION

By: /s/ LEE McGRATH

	Lee McGrath, Chief Financial Officer of Versant
	Corporation

LENDER:


GREATER BAY BANK

By:

	Authorized Signer

EXHIBIT "A" TO BUSINESS LOAN AGREEMENT

Principal $5,000,000.00	Loan Date 06-28-2001		Maturity 05-15-2002	Loan No 530037155	Call / Coll 2000		Account		Officer 602	Initials
References in the shaded area for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containg "***" has been omittted due to text length limitations.

Borrower:		Versant Corporation 6539 Dumbarton Circle Freemont, CA 94555				Lender:		Greater Bay Bank A Division of Mid-Peninsula Bank 39470 Paseo Padre Parkway Fremont, CA 94538

This EXHIBIT "A" TO BUSINESS LOAN AGREEMENT is attached to and by this reference is made a part of the Business Loan Agreement (Asset Based), dated June 28, 2001, and executed in connection with a loan or other financial accommodations between GREATER BAY BANK and Versant Corporation.

ADDITIONAL PROVISION As applicable, the definition(s) of the following financial covenants and/or defined terms contained in this Business Loan Agreement are amended to read as follows:

Working Capital. The words "Working Capital" mean Borrower's current assets less current liabilities.

Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, franchises, capitalized software, covenants not to compete, organizational costs, investments, employee/owner and intercompany accounts receivable and similar intangible items) less total debt, excluding subordinated debt.

Cash Flow. The words "Cash Flow" mean Borrower's net income after taxes, exclusive of extraordinary gains and income, plus depreciation and amortization less cash dividends, distributions and withdrawals, and repurchase of treasury stock.

Debt / Worth Ratio. The ratio "Debt / Worth" means Borrower's Total Liabilities, excluding subordinated debt, divided by Borrower's Tangible Net Worth.

THIS EXHIBIT "A" TO BUSINESS LOAN AGREEMENT IS EXECUTED ON JUNE 28, 2001.

BORROWER

VERSANT CORPORATION

By: /s/ LEE McGRATH

	Lee McGrath, Chief Financial Officer of Versant
	Corporation

LENDER:


GREATER BAY BANK

By:

	Authorized Signer

Addendum to Business Loan Agreement Dated 06/28/01 as applicable, the definition of the following financial covenants and/or terms contained in this Business Loan Agreement are amended to read as follows:

Quick Ratio: Defined as cash and equivalent plus 80% of eligble receivables divided by current liabilities (excluding deferred revenue).

/s/ LEE McGRATH

Lee McGrath, CFO of Versant
Corporation

EX-10.51 4 j1181_ex10d51.htm EX-10.51 Prepared by MerrillDirect

COMMERCIAL SECURITY AGREEMENT

Principal $5,000,000.00	Loan Date 06-28-2001		Maturity 05-15-2002	Loan No 530037155	Call / Coll 2000	Account	Officer 602	Initials
References in the shaded area for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containg "***" has been omittted due to text length limitations.

Grantor:		Versant Corporation
		6539 Dumbarton Circle
		Fremont, CA 94555

Lender:		Greater Bay Bank
		A Division of Mid-Peninsula Bank
		39470 Paseo Padre Parkway
		Fremont, CA 94538

THIS COMMERCIAL SECURITY AGREEMENT dated June 28, 2001, is made and executed between Versant Corporation ("Grantor") and Greater Bay Bank ("Lender").

GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law.

COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement:

All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles

In addition, the word "Collateral" also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located:

(A) All accessions, attachments, accessories, tools, parts, supplies, replacements and additions to any of the collateral described herein, whether added now or later.

(B) All products and produce of any of the property described in this Collateral section.

(C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section.

(D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party's insurer, whether due to judgment, settlement or other process.

(E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media.

Despite any other provision of this Agreement, Lender is not granted, and will not have, a nonpurchase money security interest in household goods, to the extent such a security interest would be prohibited by applicable law. In addition, if because of the type of any Property, Lender is required to give a notice of the right to cancel under Truth in Lending for the Indebtedness, then Lender will not have a security interest in such Collateral unless and until such a notice is given.

CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated whether Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable.

GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that:

Perfection of Security Interest. Grantor agrees to execute financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any. and all chattel paper if not delivered to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even though all or any part of the Indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender.

Notices to Lender. Grantor will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor's name; (2) change in Grantor's assumed business
name(s); (3) change in the management of the corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor's principal office address; (6) conversion of Grantor to a new or different type of business entity; or (7) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor's name will take effect until after Lender has been notified.

No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement.

Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any Account becomes subject to a security interest in favor of Lender, the Account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender's prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing.

Location of the Collateral. Except in the ordinary course of Grantor's business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor's address shown above or at such other locations as are acceptable to Lender. Upon Lender's request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located.

Removal of the Collateral. Except in the ordinary course of Grantor's business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender's prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of California, without Lender's prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral.

Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender.

Title. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has, specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons.

Repairs and Maintenance. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral.

Inspection of Collateral. Lender and Lender's designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located.

Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized.

Compliance with Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized.

Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement.

Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses "single interest insurance," which will cover only Lender's interest in the Collateral.

Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness.

Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (115) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility.

Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral.

GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness.

LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

Payment Default. Grantor fails to make any payment when due under the Indebtedness.

Other Defaults. Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Grantor.

Default in Favor of Third Parties. Should Grantor or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor's property or Grantor's or any Grantor's ability to repay the Indebtedness or perform their respective obligations under this Agreement or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Grantor or on Grantor's behalf under this Agreement, the Note, or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Grantor's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to guarantor, endorser, surety, or accommodation party of any of the Indebtedness or guarantor, endorser, surety, or accommodation party dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.

Adverse Change. A material adverse change occurs in Grantors financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired.

Cure Provisions. If any default, other than a default in payment is curable and if Grantor has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Grantor, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies:

Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor.

Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession.

Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender's own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least fifteen (15) days, or such lesser time as required by state law, before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid.

Appoint Receiver. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver.

Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender's discretion transfer any Collateral into Lender's own name or that of Lender's nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender.

Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper.

Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise.

Election of Remedies. Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this
Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

Amendments.' This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Choice of Venue. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of Alameda County, State of California.

Preference Payments. Any monies Lender pays because of. an asserted preference claim in Grantor's bankruptcy will become a part of the Indebtedness and, at Lender's option, shall be payable by Grantor as provided in this Agreement.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors.

Power of Attorney. Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement . Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral.

Waiver of Co-Obligor's Rights. If more than one person is obligated for the Indebtedness, Grantor irrevocably waives, disclaims and relinquishes all claims against such other person which Grantor has or would otherwise have by virtue of payment of the Indebtedness or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration.

Successors and Assigns. Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness.

Survival of Representations and Warranties. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor's Indebtedness shall be paid in full.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

Account. The word "Account" means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Grantor (or to a third party grantor acceptable to Lender).

Agreement. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time.

Borrower. The word "Borrower" means Versant Corporation, and all other persons and entities signing the Note in whatever capacity.

Collateral. The word "Collateral" means all of Grantor's right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement.

Default. The word "Default" means the Default set forth in this Agreement in the section titled "Default".

Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement.

Grantor. The word "Grantor" means Versant Corporation.

Guaranty. The word "Guaranty" means the guaranty from guarantor, endorser, surety, or accommodation party to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents.

Lender. The word "Lender" means Greater Bay Bank, its successors and assigns.

Note. The word "Note" means the Note executed by Grantor in the principal amount of $5,000,000.00 dated June 28, 2001, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.

GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 28, 2001.

GRANTOR:

VERSANT CORPORATION

By: /s/ LEE McGRATH

	Lee McGrath, Chief Financial Officer of Versant
	Corporation