<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-28540
VERSANT OBJECT TECHNOLOGY CORPORATION
(Exact name of Small Business Issuer as specified in its charter)
California 94-3079392
State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
1380 Willow Road
Menlo Park, California 94025
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (415) 329-7500
Check whether the Issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of common stock, no par value, outstanding
as of October 31, 1996: 8,718,452
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE> 2
VERSANT OBJECT TECHNOLOGY CORPORATION
FORM 10-QSB
Quarterly Period Ended September 30, 1996
Table of Contents
Part I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements Page No.
<S> <C>
Condensed Balance Sheets -- September 30, 1996 and December 31, 1995 3
Condensed Statements of Operations -- Quarters Ended September 30, 1996 and
1995, and Nine Months Ended September 30, 1996 and 1995 4
Condensed Statements of Cash Flows -- Nine Months Ended September 30, 1996 and
1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Part II. Other Information -- Not Applicable.
Signature 14
</TABLE>
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements
VERSANT OBJECT TECHNOLOGY CORPORATION
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,476 $ 1,281
Short-term investments 12,741 --
Accounts receivable, net 6,492 4,025
Other current assets 375 561
-------- --------
Total current assets 22,084 5,867
Property and equipment, net 553 365
Long-term deposits 72 91
-------- --------
$ 22,709 $ 6,323
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations $ 101 $ 27
Accounts payable 281 193
Accrued liabilities 1,996 2,235
Deferred revenue 1,537 1,864
Deferred income taxes 75 --
-------- --------
Total current liabilities 3,990 4,319
-------- --------
Long-term liabilities, net of current portion:
Capitalized lease obligations 173 74
Deferred rent -- 39
-------- --------
Total long-term liabilities 173 113
-------- --------
Shareholders' equity:
Preferred stock and warrants -- 4,429
Common stock 40,857 20,488
Accumulated deficit (22,311) (23,026)
-------- --------
Total shareholders' equity 18,546 1,891
-------- --------
$ 22,709 $ 6,323
======== ========
</TABLE>
See accompanying notes
<PAGE> 4
VERSANT OBJECT TECHNOLOGY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
License $ 3,053 $ 1,588 $ 8,024 $ 5,126
Services 1,929 977 4,752 3,143
-------- -------- -------- --------
Total revenue 4,982 2,565 12,776 8,269
-------- -------- -------- --------
Cost of revenue:
License 278 154 769 857
Services 965 679 2,155 1,656
-------- -------- -------- --------
Total cost of revenue 1,243 833 2,924 2,513
-------- -------- -------- --------
Gross profit 3,739 1,732 9,852 5,756
-------- -------- -------- --------
Operating expenses:
Marketing and sales 1,987 1,547 5,842 4,563
Research and development 928 478 2,450 1,471
General and administrative 409 247 995 1,067
-------- -------- -------- --------
Total operating expenses 3,324 2,272 9,287 7,101
-------- -------- -------- --------
Income (loss) from operations 415 (540) 565 (1,345)
Interest income and other, net 256 12 238 69
Foreign tax expense (2) (4) (13) (67)
-------- -------- -------- --------
Income (loss) before taxes 669 (532) 790 (1,343)
Provision for income taxes 63 -- 75 --
-------- -------- -------- --------
Net income (loss) $ 606 $ (532) $ 715 $ (1,343)
======== ======== ======== ========
Net income per share $ 0.07 $ 0.10
======== ========
Pro forma net loss per share $ (0.09) $ (0.23)
======== =======
Weighted average common and
common equivalent shares 8,831 5,976 7,273 5,822
======== ======== ======== ========
</TABLE>
See accompanying notes
<PAGE> 5
VERSANT OBJECT TECHNOLOGY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 715 $ (1,343)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 266 205
Deferred rent (10) --
Changes in current assets and liabilities:
Increase in accounts receivable (2,506) (252)
(Increase) decrease in other current assets 261 (258)
Increase (decrease) in accounts payable 87 (38)
Increase in income tax payable 75 --
Decrease in accrued liabilities (269) (706)
(Decrease) increase in deferred revenue (326) 35
-------- --------
Net cash used in operating activities (1,707) (2,357)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (454) (256)
(Increase) decrease in short-term investments (12,741) 1,692
(Increase) decrease in long-term deposits (17) 72
-------- --------
Net cash (used in) provided by investing activities (13,212) 1,508
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of repurchases 15,940 303
Proceeds from (payment of) capital lease obligations 174 (18)
-------- --------
Net cash provided by financing activities 16,114 285
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,195 (564)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,281 1,647
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,476 $ 1,083
======== ========
</TABLE>
See accompanying notes
<PAGE> 6
NOTES TO CONDENSED FINANCIAL STATEMENTS - UNAUDITED
1. Basis of Presentation
The condensed financial statements included herein have been prepared by
Versant Object Technology Corporation ("Versant" or the "Company"), without
audit, pursuant to rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements and the notes thereto should be read in conjunction with the
Company's audited financial statements included in the Company's Form SB-2
Registration Statement declared effective by the SEC on July 17, 1996 as well as
the Form 10QSB for the period ending June 30, 1996. The unaudited information
has been prepared on the same basis as the annual financial statements and, in
the opinion of the Company's management, reflects all normal recurring
adjustments necessary for a fair presentation of the information for the periods
presented. The interim results presented herein are not necessarily indicative
of the results of operations that may be expected for the full fiscal year
ending December 31, 1996 or any other future period.
2. Summary of Significant Accounting Policies
REVENUE RECOGNITION
Revenue consists mainly of revenue earned under software license agreements,
maintenance agreements and consulting and training activities.
Revenue from perpetual software license agreements is recognized as revenue
upon shipment of the software if no significant vendor obligations remain,
payments are due within the Company's normal payment terms and collection of the
resulting receivable is probable. In instances where a significant vendor
obligation exists, revenue recognition is delayed until such obligation is
satisfied. If an acceptance period is required, revenue is recognized upon the
earlier of customer acceptance or the expiration of the acceptance period.
The Company has entered into contracts with certain of its customers that
require the Company to perform development work in return for nonrecurring
engineering fees. Revenue related to such nonrecurring engineering fees is
generally recognized on a percentage of completion basis.
Maintenance revenue is recognized ratably over the term of the maintenance
contract. Consulting and training revenue is recognized when a customer's
purchase order is received and the services are performed.
NET INCOME PER SHARE
Except as noted below, net income per share is computed using the weighted
average number of outstanding shares of common and common equivalents from
outstanding stock options (using the treasury stock method when dilutive).
Common equivalent shares were excluded from the computation if their effect was
antidilutive except that, pursuant to the SEC Staff Accounting Bulletin and
Staff policy, such computations include all common and common stock equivalent
shares issued within 12 months preceding the filing date of the Company's
initial public offering as if they were outstanding for all periods presented
(using the treasury stock method assuming the public offering price).
Mandatorily redeemable convertible preferred stock outstanding during the period
were included (using the if converted method) in the computation as common
equivalent shares even though the effect is antidilutive. Primary and fully
diluted earnings per common share were substantially the same in all periods
presented.
<PAGE> 7
INVESTMENTS
Investments have been accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115. The Company classifies its
investments as held to maturity investments as defined under the provisions of
SFAS 115 and carries such investments at amortized cost in its balance sheet.
SOFTWARE DEVELOPMENT COST
The Company capitalizes eligible computer software development costs upon
the establishment of technological feasibility, which the Company has defined as
completion of a working model. For the periods presented, costs eligible for
capitalization were insignificant and, thus, the Company charged all software
development costs to research and development expense as incurred.
INITIAL PUBLIC OFFERING
In July and August 1996, the Company consummated a public offering of
2,380,500 shares of common stock (including an over-allotment option of 310,500
shares, which was exercised in August 1996) at $8.00 per share (which included
243,658 shares sold by stockholders), resulting in net proceeds to the Company
of approximately $14.9 million after offering costs. Upon the closing of the
offering, all outstanding shares of preferred stock were converted to common
stock on a one-for-one basis. Proceeds from the offering were invested in cash
equivalents and short-term investments consisting primarily of United States
Treasury Bills, with $300,000 used to repay indebtedness under the Company's
bank credit line.
3. Stock Plans
1996 Equity Incentive Plan
In May 1996, the Board adopted the 1996 Equity Incentive Plan (the "1996
Equity Plan") and the Company's shareholders approved the 1996 Equity Plan in
June 1996. The 1996 Equity Plan will serve as the successor equity incentive
program to the Company's 1989 Option Plan. The 1996 Equity Plan provides for the
grant of stock options and stock bonuses and the issuance of restricted stock by
the Company to its employees, officers, directors, consultants, independent
contractors and advisors. Options granted under the 1989 Option Plan before its
termination upon the effective date of the offering, will remain outstanding in
accordance with their terms, but no further options will be granted under the
1989 Option Plan. The Company has reserved 850,000 shares of common stock for
issuance under the 1996 Equity Plan. Any authorized shares that are not issued
or subject to outstanding grants under the 1989 Option Plan will be available
for grant and issuance in connection with future awards under the 1996 Equity
Plan.
1996 Employee Stock Purchase Plan
In May 1996, the Board adopted the 1996 Employee Stock Purchase Plan (the
"Purchase Plan") and the Company's shareholders approved the Purchase Plan in
June 1996. The Company has reserved 125,000 shares of common stock for issuance
under the Purchase Plan. The Purchase Plan will enable eligible employees to
purchase common stock at 85% of the lower of the fair market value of the
Company's common stock on the first or last day of each offering period.
1996 Directors Stock Option Plan
In May 1996, the Board adopted the 1996 Directors Stock Option Plan (the
"Directors Plan") and the Company's shareholders approved the Directors Plan in
June 1996. The Company has reserved 75,000 shares of common stock for issuance
under the Directors Plan. The Directors Plan provides for the grant of
nonqualified stock options to nonemployee directors of the Company. The exercise
price of all options granted under the Directors Plan will be the fair market
value of the common stock on the date of grant. All options issued under the
Directors Plan will vest as to 50% of the shares on each of the first two
anniversaries following the date of grant, provided the optionee continues as a
member of the Board or as a consultant to the Company.
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements within in
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended, which reflect the
Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below and in the Company's Form SB-2
Registration Statement, declared effective by the SEC on July 17, 1996, that
could cause actual results to differ materially from historical results or
those anticipated in the forward-looking statements. The Company has identified
with a preceding asterisk ("*") various sentences within this Form 10-QSB which
contain such forward-looking statements, and words such as "believes,"
"anticipates," "expects," "may," "future," "intends" and similar expressions
are intended to identify forward-looking statements; however, neither the
preceding asterisk nor these words are the exclusive means of identifying such
statements. In addition, the remainder of this "overview" section, which has no
asterisks for improved readability, includes a substantial number of
forward-looking statements. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report.
Substantially all of Versant's revenue has been derived from (i) sales
of development and deployment licenses for the Versant ODBMS, (ii) related
maintenance and support, training, consulting and nonrecurring engineering fees
(the "Associated Services") and (iii) the resale of licenses, maintenance,
training and consulting for third-party products that complement the Versant
ODBMS ("Third-Party Products"). The Company currently expects that licenses of
the Versant ODBMS and Associated Services will be the Company's principal
sources of revenue for the foreseeable future. As a consequence, the Company's
future operating results will depend upon its ability to expand market
acceptance of the Versant ODBMS.
Versant commenced field trials of version 5.0 of its ODBMS in the third
quarter. The Company also entered into a strategic relationship with Spyglass,
Inc. during the quarter. As part of the relationship Versant has licensed the
Versant ODBMS to Spyglass for use in the Surfwatch Proserver as the core
caching engine. Spyglass has also licensed the Versant ODBMS for future use
within other Spyglass products, including the Spyglass Web Server and Spyglass
WebNotes products.
The Company's operating results have varied significantly in the past and
are expected to vary significantly in the future, on a quarterly and annual
basis, as a result of a number of factors, many of which are outside the
Company's control. These factors include demand for the Company's products and
services and the size, timing and structure of significant licenses by
customers. The Company's license revenue is substantially dependent on orders
booked and shipped in that quarter, and historically a majority of the Company's
revenue in any quarter has been recorded in the third month of that quarter,
with a concentration of such revenue in the last few days of the quarter. Due to
these and other factors, the Company's revenue for any future period will vary
significantly from any prior period, and it is impossible to predict revenue for
any period prior to its end.
A significant portion of the Company's total revenue has been, and the
Company believes will continue to be, derived from a limited number of orders
placed by large organizations. The timing of such orders and their fulfillment
has caused, and likely will continue to cause, material fluctuations in the
Company's operating results, particularly on a quarterly basis. In the third
quarter of 1996, one customer, an independent European owned distributor,
accounted for approximately 36% of total revenue. The Company's sales cycle,
which varies substantially from customer to customer, often exceeds six months
and can extend to a year or more. Because of this lengthy sales cycle and the
relatively large average dollar size of individual licenses, lost or delayed
sales can have a significant impact on the Company's operating results for a
particular period. Further, in the third quarter of 1996, approximately 56% of
the Company's license revenue was derived from customers in the
telecommunications
16
<PAGE> 9
industry. There can be no assurance that the Company will earn comparable
revenue from these customers or this industry in future periods.
Although Versant was profitable in the second and fourth quarters of 1995
and the second and third quarters of 1996, it has never been profitable on an
annual basis, and there can be no assurance that the Company will be profitable
on a quarterly or annual basis in the future. The Company's limited operating
history and the relative immaturity of its market make the prediction of future
operating results impossible. The market for the Company's products is highly
competitive, and the Company may experience increasing pricing pressures from
both its current competitors and new market entrants. Any material reduction in
the price of the Company's products would materially adversely affect the
Company's operating results.
RESULTS OF OPERATIONS
The following table sets forth the percentages that income statement items are
to total revenue for the three months ended September 30, 1996 and 1995 and the
nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
License 61.28 % 61.91 % 62.81 % 61.99 %
Services 38.72 38.09 37.19 38.01
------ ------ ------ ------
Total revenue 100.00 100.00 100.00 100.00
------ ------ ------ ------
Cost of revenue:
License 5.58 6.00 6.02 10.36
Services 19.37 26.47 16.87 20.03
------ ------ ------ ------
Total cost of revenue 24.95 32.47 22.89 30.39
------ ------ ------ ------
Gross profit 75.05 67.53 77.11 69.61
------ ------ ------ ------
Operating expenses:
Marketing and sales 39.88 60.31 45.73 55.18
Research and development 18.63 18.64 19.18 17.79
General and administrative 8.21 9.63 7.79 12.90
------ ------ ------ ------
Total operating expenses 66.72 88.58 72.70 85.87
------ ------ ------ ------
Income (loss) from operations 8.33 (21.05) 4.41 (16.26)
Interest income (expense), net 5.14 0.47 1.86 0.83
Foreign tax expense (0.04) (0.16) (0.10) (0.81)
------ ------ ------ ------
Income (loss) before taxes 13.43 (20.74) 6.17 (16.24)
Provision for income taxes 1.26 0.00 0.59 0.00
------ ------ ------ ------
Net income (loss) 12.17 % (20.74)% 5.58 % (16.24)%
====== ====== ====== ======
</TABLE>
<PAGE> 10
Revenue
The Company's total revenue increased 94%, from $2.6 million in the
third quarter of 1995 to $5.0 million in the third quarter of 1996. This
increase was fueled by growth in international revenues which increased from
$750,000 in the third quarter of 1995 to $2.3 million in the third quarter of
1996. The Company's total revenue increased 55%, from $8.3 million for the nine
months ended September 30, 1995 to $12.8 million in the corresponding period of
1996. This increase was due to an expansion of the sales of the Company's
products and services.
License revenue increased 92% from $1.6 million in the third quarter of
1995 to $3.1 million in the third quarter of 1996. The increase in license
revenue was primarily due to a $1.4 million order received from Versant Europe,
an independent European owned distributor, for resale to a major European
customer, as well as increased deployments by the Company's customers. License
revenue increased 57%, from $5.1 million for the nine months ended September
30, 1995 to $8.0 million for the corresponding period of 1996. The increase in
license revenue is primarily due to increased deployments by the Company's
customers as well as a larger average order size. License revenue as a
percentage of total revenue remained stable at approximately 62% and 63% for
the nine months ended September 30, 1995 and 1996, respectively.
Services revenue increased 97%, from $977,000 in the third quarter of
1995 to $1.9 million in the third quarter of 1996. The Company's services
revenue increased 51%, from $3.1 million for the nine months ended September
30, 1995 to $4.8 million in the corresponding period of 1996. The increase in
services revenue was principally due to an increase in training and consulting
business with end-user customers and increased maintenance revenue from a
larger installed base.
Export sales increased from 29% of the Company's total revenue in the
third quarter of 1995 to 46% in the third quarter of 1996. Export sales
accounted for 37% of total revenue for the nine months ended September 30, 1995
and 31% of total revenue for the corresponding period of 1996. The primary
sources of the Company's export sales are direct sales to Australia and Canada
and royalties from Versant Europe. *The Company intends to expand its sales and
marketing activities outside the United States, which will require significant
management attention and financial resources. During 1995, the Company entered
into an agreement with ISAR-Vermogensverwaltung Gbr mbH ("ISAR"), an entity
formed by a group of European investors, pursuant to which ISAR organized and
funded Versant Europe. Versant provided Versant Europe with exclusive European
distribution rights for the Company's products, subject to the rights of
existing distributors, and with management responsibilities for Versant's
existing distributors in Europe. Versant has the right to acquire Versant
Europe at a formula price. Versant has expanded operations in its Australian
branch to include five sales and technical services employees. International
operations are subject to a number of risks including longer receivable
collection periods and greater difficulty in accounts receivable collections,
unexpected changes in regulatory requirements, dependence on independent
resellers, multiple and conflicting regulations and technology standards,
import and export restrictions and tariffs, difficulties and costs of staffing
and managing foreign operations, potentially adverse tax consequences, the
burdens of complying with a variety of foreign laws and the impact of business
cycles and economic instability outside the United States.
During September 1996, Versant learned that MCI Communications, a major
Versant customer, had initiated a business re-evaluation of its new Horizon
customer billing system and replaced the project manager. Due to this
re-evaluation, Versant did not recognize license revenue in the third quarter
for licenses previously ordered by MCI under the Horizon contract. MCI
subsequently announced a proposed merger with British Telecom. Versant does not
know what impact, if any, the proposed merger or project re-evaluation will
have on the Horizon project or Versant's relationship with MCI.
Cost of Revenue
Total cost of revenue increased 49%, from $833,000 in the third quarter
of 1995 to $1.2 million in the third quarter of 1996, principally as a result
of the expansion of the training and consulting organization. However, total
cost of revenue as a percentage of total revenue decreased from 32% in the
third quarter of 1995 to 25% in the third quarter of 1996. The
<PAGE> 11
Company's total cost of revenue increased 16%, from $2.5 million for the nine
months ended September 30, 1995 to $2.9 million for the nine months ended
September 30, 1996. However, total cost of revenue as a percentage of total
revenue decreased from 30% for the nine months ended September 30, 1995 to 23%
for the nine months ended September 30, 1996.
Cost of license revenue consists primarily of product royalty obligations
incurred by the Company when it sub-licenses Third-Party Products, royalty
obligations incurred by the Company under a porting services agreement, bad debt
reserves, product packaging, freight, user manuals, product media and production
labor costs. Cost of license revenue increased 81%, from $154,000 in the third
quarter of 1995 to $278,000 in the third quarter of 1996, due primarily to an
increase in the Company's bad debt reserve. Cost of license revenue as a
percentage of license revenue remained stable at 10% and 9% for the third
quarters of 1995 and 1996 respectively. Cost of license revenues decreased 10%
from $857,000 or 17% of license revenue for the nine months ended September 30,
1995 to $769,000 or 10% of license revenue in the corresponding period of 1996.
The decrease in cost of license revenue was primarily due to a decrease in
royalty obligations on Third-Party Products partially offset by an increase in
the Company's bad debt reserve.
Cost of services revenue consists principally of personnel costs
associated with providing training, consulting, technical support and
nonrecurring engineering work paid for by customers. These costs increased 42%
from $679,000 in the third quarter of 1995 to $965,000 in the third quarter of
1996. Cost of services revenue increased 30% from $l.7 million for the nine
months ended September 30, 1995 to $2.2 million for the nine months ended
September 30, 1996. These cost increases are due to the expansion of the
training, consulting and support organizations. Cost of services as a
percentage of services revenue decreased from 70% in the third quarter of 1995
to 50% in the third quarter of 1996. Cost of services revenue as a percentage
of services revenue decreased from 53% for the nine months ended September 30,
1995 to 45% in the corresponding period in 1996. Cost of service revenue as a
percentage of service revenue has declined due to an increase in maintenance
revenue without a corresponding increase in the cost of maintenance revenue and
a reduction in the number of outside consultants that the Company has hired to
meet its consulting obligations. The cost of services as a percentage of
service revenues may vary between periods due to the mix of services provided
by the Company and the resources used to provide these services. *The Company
anticipates that cost of services revenue as a percentage of services revenue
will not continue to decline. *To the extent that services revenue increases
relative to license revenue, overall gross margins would decline, which could
have an adverse effect on the Company's operating results and financial
condition.
Operating Expenses
Marketing and sales expenses consist primarily of marketing and sales
personnel costs, including sales commissions, recruiting and travel,
advertising, public relations, seminars, trade shows, product descriptive
literature, product management, sales offices and mailings. Marketing and sales
expenses increased 28% from $1.5 million in the third quarter of 1995 to $2.0
million in the third quarter of 1996. Marketing and sales expenses increased 28%
from $4.6 million for the nine months ended September 30, 1995 to $5.8 million
for the corresponding period in 1996. The increase in marketing and sales
expenses was primarily due to increased commissions associated with higher
levels of revenue, expanded marketing activities, including trade shows and
promotional expenses as well as growth of the sales force. Marketing and sales
expenses as a percentage of revenue decreased from 60% in the third quarter of
1995 to 40% in the third quarter of 1996. Marketing and sales expenses as a
percentage of revenue decreased from 55% for the nine months ended September 30,
1995 to 46% in the corresponding period in 1996. The decrease in marketing and
sales expenses as a percentage of total revenue was attributable to the growth
in revenue. *The Company expects to continue hiring additional marketing and
sales personnel and to increase promotional expenses and that marketing and
sales expense may increase as a percentage of total revenue as a result.
Research and development expenses consist primarily of salaries,
recruiting and personnel-related expenses, the costs of an ISO 9001 quality
program, depreciation of development equipment, supplies and travel. Research
and development expenses increased 94% from $478,000 or 19% of total revenue in
the third quarter of 1995 to $928,000 or 19% of total revenue in the third
quarter of 1996. Research and development costs increased 67% from $1.5 million
or 18% of total revenue for the nine months ended September 30, 1995 to $2.5
million or 19% of total revenue in the corresponding period in 1996. The
increase in research and development expense is primarily attributable to an
increase in the number of software engineers and related recruiting expenses as
well as the costs of an ongoing ISO 9001 quality certification program. To
date, nearly all research and development expenditures have been expensed as
incurred. *The Company anticipates that it will continue to devote substantial
resources to research and development.
<PAGE> 12
General and administrative expenses consist primarily of salaries,
recruiting and other personnel-related expenses for the Company's accounting,
human resources, management information systems, legal and general management
functions. In addition, general and administrative expenses include outside
legal and audit costs. General and administrative expenses increased 66% from
$247,000 in the third quarter of 1995 to $409,000 in the third quarter of 1996.
The increase in general and administrative expense is largely due to the costs
associated with being a public company as well as an expanded organization.
General and administrative expenses as a percentage of revenue decreased from
10% in the third quarter of 1995 to 8% in the third quarter of 1996 primarily
due to the growth of revenue. General and administrative expenses decreased 7%
from $1.1 million or 13% of total revenue for the nine months ended September
30, 1995 to $995,000 or 8% of total revenue for the corresponding period in
1996. General and administrative expenses were unusually high in the first nine
months of 1995 due to the cost of litigating an intellectual property matter
settled in 1995. General and administrative expenses outside of these
litigation costs have increased modestly and therefore have decreased as a
percentage of total revenue due to the growth of revenue. *The Company believes
that its general and administrative expenses will continue to increase as the
Company expands its administrative staff and incurs additional costs related to
being a public company.
Interest income and other, net includes interest earned on the
Company's cash reserves, interest expense related principally to leases and
$120,000 of other income stemming from a contract settlement. The increase from
$12,000 in the third quarter of 1995 to $256,000 in the third quarter of 1996
was due to the interest earned on the proceeds received from the initial public
offering as well as the contract settlement.
The Company's effective tax rate of 9% for the nine months ended
September 30, 1996 reflects a federal alternative minimum tax provision. The
effective tax rate presented in all periods presented is lower than the
statutory rate principally due to the utilization of net operating loss
carryforwards.
As of September 30, 1996, the Company had a total of 97 employees, 92
of whom were based in the United States and 5 of whom were based in Australia.
Of the total, 49 were engaged in engineering and technical services, 37 were
engaged in sales and marketing and 11 were engaged in production,
administration and finance. *The Company expects to continue to expand its
operations in all functional areas and to continue to increase employment to
support this expansion.
Liquidity and Capital Resources
Total assets as of September 30, 1996 increased $16.4 million from
December 31, 1995. The increase was primarily due to the Company's initial
public offering completed on July 23, 1996 resulting in net proceeds to the
Company of approximately $14.9 million after offering costs. Net accounts
receivable increased $2.5 million primarily due to increased sales activity as
well as a delay in payment by MCI Communications related to its reevaluation of
the Horizon project. Versant is working with MCI to resolve these payment
delays.
Total liabilities as of September 30, 1996, decreased $269,000 from
December 31, 1995. The decrease was primarily due to decreases in accrued
liabilities and deferred revenue. The decrease in accrued liabilities resulted
primarily from payment of amounts due to Miramar Technology for royalties and
expenses related to Argos partially offset by increases in commissions payable
as well as Employee Stock Purchase Plan contributions made by employees and
held by the Company prior to the purchase of Versant stock. The decrease in
deferred revenue is primarily attributable to performance on nonrecurring
engineering contracts.
For the nine months ended September 30, 1996, operating activities used $1.7
million primarily as a result of an increase in accounts receivable. Investing
activities used cash of $13.2 million primarily as a result of short-term
investment of the proceeds of the initial public offering. Financing activities
provided $16.1 million primarily from the proceeds of the initial public
offering.
At September 30, 1996, the Company had $2.5 million in cash and cash
equivalents and $12.7 million in short-term investments. The Company maintains a
revolving credit line with a bank that expires June 1997. The Company's
short-term investments consist of United States Treasury Bills. Management
expects that, in the future, cash in excess of current requirements will be
invested in short-term, interest-bearing, investment grade securities.
The maximum amount that can be borrowed under the revolving credit line is
$2.5 million. Borrowings under the revolving credit line are limited to 80% of
eligible accounts receivable and are secured by a lien on substantially all of
the Company's assets (which lien shall be released at such time and for so long,
as the Company meets certain net profit and tangible net worth tests). These
borrowings bear interest at a rate of 0.50% over the bank's prime lending rate.
The loan agreement contains certain financial covenants and also prohibits cash
dividends and mergers and acquisitions without the Bank's prior approval. The
Company is currently in compliance with these covenants. The Company also has a
line of credit from a finance company that provides $500,000 for use in leasing
of approved
<PAGE> 13
capital equipment through March 31, 1997. The Company expects that its available
funds will satisfy the Company's projected working capital and capital
expenditures for at least the next twelve months.
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSANT OBJECT TECHNOLOGY CORPORATION
Date: November 14, 1996 /s/ Richard I. Kadet
------------------------------------------------
Richard I. Kadet
Vice President Finance and Administration.
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal
Financial Officer)
<PAGE> 15
EXHIBIT INDEX
Exhibit No.
- -----------
Ex. 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF OPERATIONS AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,476
<SECURITIES> 12,741
<RECEIVABLES> 6,884
<ALLOWANCES> 392
<INVENTORY> 0
<CURRENT-ASSETS> 22,084
<PP&E> 3,756
<DEPRECIATION> 3,203
<TOTAL-ASSETS> 22,709
<CURRENT-LIABILITIES> 3,990
<BONDS> 0
0
0
<COMMON> 40,857
<OTHER-SE> (22,311)
<TOTAL-LIABILITY-AND-EQUITY> 22,709
<SALES> 12,776
<TOTAL-REVENUES> 12,776
<CGS> 0
<TOTAL-COSTS> 2,924
<OTHER-EXPENSES> 9,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 790
<INCOME-TAX> 75
<INCOME-CONTINUING> 715
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 715
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
