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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28540
VERSANT OBJECT TECHNOLOGY CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3079392
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1380 WILLOW ROAD
MENLO PARK, CALIFORNIA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 329-7500
Securities registered pursuant to Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, no par value National Market System of the
Nasdaq Stock Market, Inc.
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Check whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/
Registrant's revenues for the year ended December 31, 1996 were
$18,393,000
As of February 28, 1997, there were outstanding 8,793,200 shares of the
Registrant's common stock, no par value per share. As of that date, the
aggregate market value of the shares of common stock held by non-affiliates of
the Registrant (based on the closing price ($10.75) for the common stock on the
National Market System of the Nasdaq Stock Market, Inc. on February 28, 1997)
was approximately $68,719,955. This excludes 2,400,646 shares of common stock
held by directors, officers and shareholders whose ownership exceeded ten
percent of the shares outstanding at February 28, 1997. Exclusion of shares held
by any person should not be construed to indicate that such person possesses
power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by or is under
common control with the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Shareholders of the
Company to be held June 5, 1997, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1996.
Transitional Small Business Disclosure Format (check one):
Yes No X
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VERSANT OBJECT TECHNOLOGY CORPORATION
Annual Report on Form 10-KSB
For the fiscal year ended December 31, 1996
TABLE OF CONTENTS
PART I
PAGE
Item 1. Description of Business......................................... 1
Item 2. Properties...................................................... 12
Item 3. Legal Proceedings............................................... 12
Item 4. Submission of Matters to a Vote of Security Holders............. 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................. 13
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 14
Item 7. Financial Statements ........................................... 22
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 22
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............... 23
Item 10. Executive Compensation.......................................... 23
Item 11. Security Ownership of Certain Beneficial Owners and Management.. 23
Item 12. Certain Relationships and Related Transactions.................. 23
Item 13. Exhibits and Reports on Form 8-K................................ 23
Financial Statements...................................................... F-1
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
This "Description of Business" includes a number of forward-looking
statements within 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.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in this Annual Report on Form 10-KSB, including in
"Other Factors That May Affect Future Operating Results" in Item 6 and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," 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 section of the Annual Report which contain such forward
looking statements, and words such as "believes", "expects", "may", "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. The Company undertakes no obligation to revise
or update any forward-looking statements to reflect events or circumstances that
may arise after the date of this report.
Versant Object Technology Corporation ("Versant" or the "Company")
designs, develops, markets and supports high performance object database
management systems for commercial applications in distributed computing
environments. The Company's core product is the Versant Object Database
Management System (the "Versant ODBMS"), a highly scalable database management
system that combines native support for object-oriented languages with high
performance database functionality and a client-server architecture. The Versant
ODBMS enables users to store, manage and distribute information that the Company
believes often cannot be supported effectively by traditional database
technologies, including abstract data such as graphics, images, video, audio and
unstructured text, and dynamic, highly interrelated data such as networks,
advanced financial instruments and distributed, rapidly changing content in
Internet/Intranet applications. The Company also provides object-oriented
programming language interfaces, database query tools, application development
tools and legacy database access tools, and has a product in Beta test designed
to enable end-users to emulate a live database session using Web browsers. In
addition, the Company offers a variety of services, including training,
consulting and technical support, to assist users in developing and deploying
applications based on the Versant ODBMS.
The Versant ODBMS has been licensed for development and/or deployment by
approximately 600 customers including AT&T, Alcatel Network Systems, EDS,
Genuity (a Bechtel Company), HNC Software, Lucent, MCI, Motorola, SABRE Decision
Technologies, Scotiabank, Siemens Medical Systems, Sprint, Spyglass, Texaco and
TRW. The Company is a leading provider of object database management systems to
the telecommunications industry, where its products are used in strategic
distributed applications such as network modeling and management, fault
diagnosis, service activation and assurance and customer billing. The Company
has experienced increased customer acceptance in other vertical markets, such as
the market for Internet/Intranet applications and the financial services, health
care and energy markets. These markets are similar to the telecommunications
market in their increasing need for high performance support for distributed
applications involving abstract data types and dynamic, highly interrelated
information.
INDUSTRY BACKGROUND
Organizations are under increasing pressure to manage and adapt to the
forces of accelerating change and growing complexity. The combined demands of
global competition, deregulation and organizational restructuring, as well as
rapid changes in products and markets and a proliferation of new technologies,
increasingly complicate business operations. These pressures fall especially
heavily on corporate information systems, which must model this complexity,
support increasingly distributed operations and manage new types of information
that are more diverse, interrelated and dynamic.
In attempting to respond to these pressures, traditional information
technologies are being stretched to deliver solutions for which they were
neither designed nor intended. This is particularly true in the areas of
software programming and database management, where existing technology
paradigms date back to the 1970s or earlier. The "structured programming"
approach, which still dominates most software development, requires reduction of
a business problem to a series of segmented procedures that are implemented line
by line to build large, monolithic software programs. This approach can be slow
and error-prone, and often produces software programs that are costly to
maintain and difficult to change. The Company believes that as much as 60% of
existing programming resources
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can be consumed in maintaining older, legacy systems that cannot be efficiently
evolved. These limitations have led a number of industry observers to declare a
"crisis" in software development.
A newer approach to software development, object-oriented programming,
responds to many of these limitations. Object-oriented programming languages,
such as C++, Smalltalk and Java, enable software developers to realistically
model the complexities of large scale, dynamic systems, and to develop, maintain
and evolve complex programs more quickly and at a higher level of quality than
is often possible using structured programming. As a result, the Company
believes that object-oriented programming languages are increasingly being used
by software developers.
While object-oriented technology can address many software development
problems, it places new demands on existing database management systems, most of
which were designed to operate with traditional programming methodologies and
simpler types of data in centralized environments. The hierarchical and
relational database management systems now prevalent were developed at a time
when data processing operations were highly structured and performed on
centralized mainframe platforms. These systems perform well with simple types of
data (such as text and numbers) and static relationships. However, businesses
are increasingly required to deploy database management systems that can
effectively manage the problems and conditions listed below:
Abstract Data Types. Abstract data, including graphics, images,
video, audio and unstructured text, often combined in one application, are
proliferating in business applications and on the Internet.
Complex Data Relationships. Telecommunications networks,
Internet/Intranet applications, health care systems, customer support
systems, airline reservation systems and logistics management often
involve complex relationships among thousands of rapidly changing items.
Constant Change. Business rules, data relationships, technology and
information are constantly changing, requiring information systems and
applications that can be quickly deployed and flexibly evolved to adapt to
changes while maintaining overall system quality and data integrity and
while keeping the system in service.
Highly Distributed Data. Complex, interrelated, constantly changing
data may be created in or distributed to dozens or hundreds of locations
around the world, and must be carefully managed to maintain integrity yet
be available on demand to many users on different platforms.
The growth of the Internet and the World Wide Web as mainstream computing
and communication platforms compounds these challenges. The Internet
incorporates new types and combinations of dynamic, abstract data, and involves
a complex array of relationships among users, service and content providers,
data sources and information repackagers and resellers. This computing
environment is inherently distributed and dynamic and is evolving at a rapid
pace. The use of the Internet for transactional applications and internal
corporate Intranets is accelerating this complexity, further increasing demand
for new software and database technologies. Companies are increasingly seeking
to integrate Internet and Intranet applications with corporate databases, but
the abstract multimedia information and complex, changing data relationships
prevalent in these applications are not easily accommodated by hierarchical or
relational databases.
Database management systems have evolved through several generations of
technology, each responding to the data processing demands of its time but
limited in its ability to address new problems effectively. The first on-line
data management technologies indexed and stored data in a computer's file system
and provided database access to only one user at a time. These file systems are
extremely fast for single-user applications but are impractical when multiple
users need access to common data. Hierarchical databases, such as IBM's IMS, and
network databases enable multiple programs and users to process very large
volumes of similarly structured data, often in large batch operations. While
these databases provide high speed performance for such tasks as processing bank
records, phone bills and insurance information, they are relatively inflexible,
and are often inefficient in handling abstract data types and complex dynamic
relationships. The application programs developed for these systems are in many
cases over 20 years old, and can be difficult and costly to maintain and
error-prone when modified. However, because they are well suited for certain
applications, hierarchical and network databases remain in wide use today.
Relational database management systems ("RDBMSs") were developed in the
1970s to address the inflexibility of hierarchical and network databases. They
were used initially to perform ad hoc queries and later for on-line transaction
processing and decision support systems. An RDBMS stores data in a series of
two-dimensional tables and defines relationships between data by connecting rows
and columns and linking multiple tables. Complex queries are performed by
indexing multiple tables and then "joining" them to create a different view of
the data. RDBMSs are
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adept at handling simple types of information, such as alphanumeric data, and
managing static relationships, such as that between a part number and an
invoice. They are less effective in managing more abstract data types, such as
graphics, video and audio, which they must "decompose" into a series of
two-dimensional tables and then re-compose when needed, or must store as
isolated binary large objects that do not support analysis, manipulation or
relationships to other data. In addition, RDBMSs are relatively inefficient when
used to manage complex relationships because of the inherent burden of indexing
and joining multiple two-dimensional tables. This performance burden can
significantly lengthen response times and is compounded when users seek to
maintain data on more than one server in a distributed environment because data
must be transmitted to a central server where these joins can be performed. The
burden is increased as applications become more complex and information more
interrelated. As a result, the Company believes that RDBMSs cannot provide the
level of performance required by many users for a growing number of complex
distributed applications.
Relational database vendors have attempted to address some of the
shortcomings of RDBMSs by "extending" their support for abstract data types with
object-relational approaches. An example of one approach is the Informix
Universal Server, which requires a type of extension called a "data blade" for
each data type stored. These data blades perform the operation of helping the
relational engine understand data types not intended for relational storage.
However, the Universal Server uses a relational "kernel" or core engine in which
processing is performed by indexing and joining two-dimensional tables to model
and manage multi-dimensional or highly interrelated data. While the Company
believes that the use of data blades can improve relational performance, the
Company also believes that the performance of object-relational systems is
limited by its two-dimensional kernel architecture. The Company also believes
that the decision of relational database vendors to pursue object-relational or
object-oriented approaches validates the Company's belief that object-oriented
database solutions will be increasingly demanded by business organizations.
For the foregoing reasons, the Company believes today's business
organizations need to manage abstract data types as well as complex dynamic
relationships in a vastly more distributed environment and that this need is
often not effectively addressed by hierarchical, network, relational and
object-relational database management systems.
THE VERSANT SOLUTION
The Versant ODBMS is a database management system that combines native
support for object-oriented languages with high performance database
functionality and a client-server architecture. The Versant ODBMS is designed to
meet commercial users' requirements for high performance, scalability,
reliability and compatibility with heterogeneous computing platforms and legacy
information systems. The Versant ODBMS provides users with the following
benefits:
Management of Abstract Data Types. The Versant ODBMS allows users to store
and manage a wide range of abstract information, such as images, video, audio
and unstructured text, as well as traditional types of alphanumeric data. Nearly
any kind of information that can be digitized can be stored as an object in the
Versant ODBMS, while maintaining the application-defined behavior and
relationships of the objects.
Language-Independent Support for Object-Oriented Programming. The Versant
ODBMS provides native support for the leading object-oriented software
development languages -- C++ and Smalltalk, and, using an interface currently in
field trials, Java. This support facilitates rapid and flexible development,
maintenance and evolution of complex, dynamic applications that closely model
real-world systems and processes. Objects developed in these languages are
directly stored in the Versant ODBMS. In addition, the Versant ODBMS is
language-independent, allowing objects written in one object-oriented language
to interoperate with objects written in another object-oriented language.
High Performance. The Versant ODBMS architecture provides direct access
(navigation) to stored objects. Its balanced client-server architecture enhances
performance by efficiently distributing processing burdens between the client
and the server to leverage the processing power of networked computers. As a
result, certain customers running complex applications involving highly
interrelated data on the Versant ODBMS have reported up to a hundred-fold
improvement in performance compared to RDBMSs running similar applications.
Highly Scalable Support for Distributed Computing. The Versant ODBMS
architecture is designed to support the transparent integration of up to 65,000
separate databases in one network, distributed over a range of hardware and
software platforms. Each of these databases has a theoretical storage capacity
of 4.6 million terabytes, an amount far beyond the actual capacity of most
existing operating systems. Through object-level operations and other design
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features, the Versant ODBMS can be scaled from small workgroup operations to
thousands of users over wide area networks or the Internet.
Reliability, Availability and Serviceability. The Versant ODBMS offers a
number of features designed to permit continuous operation, including features
providing on-line backup and recovery and on-line modification of the database
system, as well as system utilities that can operate while the system is
running. These features, together with replication and disk mirroring provided
by the Company's Fault Tolerant Server, support operations 24 hours per day, 365
days per year in environments such as airline reservation, telecommunications
network or commercial banking systems, where it is critical that the database be
continuously available.
Support for Three-Tier Architectures. Traditional two-tier architectures
are adequate for closely coupled client-server environments but become unwieldy
in large, distributed systems. The Versant ODBMS supports three-tier
architectures, in which application logic resides as a middle layer between
clients and data stores. This architecture insulates data from constant change,
allows an end-user or application to locate data across multiple databases and
improves the productivity and quality of application development and
maintenance.
Integration with Users' Existing Information Systems. The Versant ODBMS
operates on a wide range of client and server platforms, including
industry-leading UNIX platforms from Sun Microsystems, Hewlett-Packard, IBM,
Digital Equipment Corporation and Silicon Graphics, as well as Microsoft's
Windows 3.1, Windows 95 and Windows NT platforms and IBM's OS/2 platform.
Objects can be readily accessed and stored by any combination of these platforms
in a heterogeneous network. In addition, Versant-based applications can
interoperate with information stored in relational database management systems,
enabling such applications to complement RDBMS strengths in structured
applications. These compatibilities allow users to protect their existing
investments in databases and information systems while migrating newer systems
to object-oriented platforms.
STRATEGY
Versant's objective is to be the leading provider of object management
solutions for commercial applications in distributed information systems. Key
elements of the Company's strategy to achieve this objective include the
following:
Extend Technology Leadership. The Company's strategy is to leverage its
knowledge and expertise in object database management systems for distributed
commercial applications. The Company believes that its product architecture
includes a number of important technological advances and that this
technological leadership is essential to its continued ability to compete
effectively. *The Company intends to extend its leadership position by
continuing to invest in internal research and development, establishing
strategic relationships with leading providers of complementary technologies and
integrating the Versant ODBMS with products offered by third parties.
Leverage Strength in Telecommunications to Other Vertical Markets. The
Company is a leading provider of object database management solutions to the
telecommunications market, where its products are used in such strategic,
distributed applications as network modeling and management, fault diagnosis,
service activation and assurance and customer billing. The Company believes that
its experience and success in this demanding market positions it to address
other vertical markets such as financial services, health care and energy. These
markets are similar to the telecommunications market in their increasing
reliance on large networks and need for high performance support for abstract
data types and for distributed, complex applications involving dynamic, highly
interrelated information.
Capitalize on the Internet/Intranet Market Opportunity. The Company
believes that the growth of the Internet and Intranets as computing environments
will significantly expand the market opportunity for the Company's object
database management technology. Internet/Intranet computing environments and
applications are highly distributed and are increasingly becoming more complex,
requiring highly scalable, high performance database systems as their
infrastructure. In addition, Internet/Intranet applications increasingly
incorporate abstract data types and are increasingly being addressed by
object-oriented programming languages such as C++, Smalltalk and Java. As a
result, the Company believes that its product architecture and its
telecommunications experience position it to capitalize upon the
Internet/Intranet market. Certain of the Company's customers, including EDS,
Genuity, Primus and Spyglass, are using the Company's technology to develop
and/or deploy Internet/Intranet applications designed to enhance the performance
of Internet/Intranet infrastructures. *The Company intends to continue working
with partners to improve the performance of Internet/Intranet infrastructures,
although there can be no assurance that the
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Company and/or its partners or customers will be successful in developing
solutions that enhance the performance of such infrastructures.
Expand Distribution Channels. *The Company intends to expand both its
direct and indirect distribution channels by hiring additional direct sales
personnel and recruiting additional VARs, distributors and other resellers. *As
familiarity with object-oriented technology and awareness of the Company's
products increase, the Company believes that it will be able to increase its use
of indirect sales channels to address a broader market and to capitalize on
resellers' integration capabilities. In addition, the Company believes that
international markets present attractive opportunities, particularly as
telecommunications and other industries face increasing change and competitive
pressures worldwide. *The Company intends to continue to expand its
international distribution network and foreign direct sales operations to
capitalize on these opportunities, and in March 1997 the Company exercised its
option to acquire Versant Object Technology GmbH, its independent, German-based
European distributor ("Versant Europe").
Enable Customers to Implement a Complete Solution. The Company believes
that its object database management systems can provide customers with a
foundation upon which they can build a broader object-oriented environment that
includes development language interfaces, object request brokers, class
libraries and tools for the development of applications and interfaces and for
the integration of existing data and applications. In addition to the Versant
ODBMS, the Company currently provides object-oriented programming language
interfaces, database query tools, application development tools for use with the
Versant ODBMS and legacy database access tools, and has a product in Beta test
designed to enable end-users to emulate a live database session using Web
browsers. *The Company intends to expand the breadth of its product offerings
through internal development efforts and through marketing, licensing and other
relationships with providers of complementary technologies and other market
participants. The Company believes that by providing its customers with a more
complete solution, it can facilitate their adoption of object-oriented
technology and expand the use and value of its products.
Increase Penetration of Current Customer Base. The Company seeks to
generate incremental, recurring revenue from its installed base of customers. A
customer's successful development of an application under a development license
can lead to additional revenue from deployment licenses. The scalability of the
Versant ODBMS enables customers to add end-users, providing additional license
revenue to the Company as customers expand their use of the product. The
adaptability of the Versant ODBMS to a wide range of applications allows
customers who have successfully implemented the Versant ODBMS for one function
to develop applications for other functions.
PRODUCTS AND SERVICES
The Company's core product is the Versant ODBMS, a high performance object
database management system. In addition, the Company offers object-oriented
programming language interfaces, database query tools, application development
tools and legacy database access tools, and has a product in Beta test designed
to emulate a live database session using Web browsers. Customers licensing the
Versant ODBMS receive the database engine with one object-oriented programming
language interface and a set of integrated database utilities. For additional
fees, customers may obtain additional programming language interfaces, and users
requiring continuous operation in mission-critical environments can license the
Versant Fault Tolerant Server. The Company offers a variety of services to
assist customers in the design, development and management of their database
applications, including training, consulting and custom development services.
Products
Versant ODBMS. The Versant ODBMS is designed to support multi-user,
commercial applications in distributed environments. Its balanced client-server
architecture enables the system to process a wide variety of abstract data types
and complex applications in a highly concurrent, high performance manner. The
product is designed to integrate over 65,000 databases connected over a like
number of locations on a variety of hardware and software platforms. Each
database has a theoretical storage capacity of 4.6 million terabytes, an amount
far beyond the actual capacity of most existing operating systems. The Company
believes that the customer applications developed to date have used only a small
portion of this theoretical capacity. The Versant ODBMS implements a variety of
database features, including two-phase commits for distributed transaction
integrity and database triggers to monitor changing events and data and to
notify users and applications when specified events occur. In addition, on-line
management utilities enable routine maintenance to be performed while the
database is running. These include utilities to perform backup operations,
manage log files, dynamically evolve database schema, add, delete and compact
volumes on disk storage and related functions. These utilities provide multiple
levels of administrative access and application security. With version 5.0 of
the Versant ODBMS (released in March 1997), Versant provides substantial
additional
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performance and scalability features, including multi-threaded database client
and server and multi-session client capabilities, logging and memory management
enhancements and full operations on Symmetric Multi-Processing server computers.
In combination, these new features enhance the ability of the Versant ODBMS to
support massive centralized or distributed computing infrastructures.
Programming Language Interfaces. The Versant ODBMS implements an object
model that is a superset of the capabilities of C++, Smalltalk and Java. The
interfaces to these object-oriented languages make the database appear to be a
natural and transparent extension of the language. The Smalltalk interface
supports both IBM VisualAge and ParcPlace VisualWorks Smalltalk environments.
Programs written in any of these languages can use objects written in another,
allowing integration of corporate data stores regardless of application
development language. In 1996, the Company substantially completed development
of the Versant Java Direct Interface, which is currently in Beta test on Solaris
platforms, and the Company is currently completing development work to port this
interface to other platforms. In addition, the Company provides a C language
interface.
Fault Tolerant Server. For continuous operation in mission critical
environments, the Company offers the Versant Fault Tolerant Server. This product
ensures transparent failure recovery by connecting database clients to
synchronized copies of the database stored on physically separate computers. If
one of the databases fails due to operating system failure, hardware breakdown
or other interruption, the other database continues operation without
application interruption. When the failed database is restored, the two
databases automatically resynchronize and resume operations without application
interruption.
Internet/Intranet Products. Customers are using the Versant ODBMS to
develop and/or deploy Internet/Intranet applications including demographic
analysis, vertical shopping kiosks, multi-organization decision making and
transaction management. The Company currently has two new products in Beta test
that are designed specifically to enable the Versant ODBMS to provide enhanced
support for advanced Internet and Intranet applications. One product, Versant
Web, is designed to emulate a live database session using commercially available
Web browsers. The second, the Versant Java Direct Interface, allows Internet
application developers to write Java applications directly to the Versant ODBMS.
Certain of the Company's customers are also using Versant technology to create
applications designed to improve the performance of Internet/Intranet
infrastructures. The Company's ability to successfully evolve its new products
from Beta test to commercial release is subject to a number of risks and
uncertainties, and no assurances can be given regarding the timing of such
commercial releases or the functionality that will ultimately be provided in any
commercially available new product.
Data Access and Integration Tools. The Versant ODBMS allows users a choice
of access methods for querying and manipulating data in the Versant ODBMS and to
obtain data from relational databases. With the Versant SQL Suite, the Company
offers Open Database Connectivity ("ODBC") capability and Structured Query
Language ("SQL") access to data stored in relational databases using
industry-standard off-the-shelf query and reporting tools. These tools permit
customers to retain their investments in legacy systems while addressing new
applications with the productivity, flexibility and performance characteristics
available through object technology.
Application Development Tools. In 1994, Versant entered into an agreement
with Miramar Technology S.A. de C.V. ("Miramar") for joint development and
marketing of Miramar's Argos development tool, which Versant marketed as Versant
ARGOS. Effective December 31, 1996, the agreement with Miramar expired and was
not renewed. In Tools.H++, the Company has developed a product enhancement
integrating the Versant ODBMS with C++ class libraries from Rogue Wave and is
negotiating a license from Rogue Wave to allow the Company to resell the Rogue
Wave class libraries to its customers.
Licensing and Pricing. The Company licenses its products directly to
end-users principally through three types of licenses -- development licenses,
deployment server licenses and deployment client licenses. The development
license is sold on a "per seat" basis and authorizes the customer to develop an
application program that uses the Versant ODBMS. Before a customer may deploy an
application, it must purchase at least one deployment server license and one
deployment client license for each computer connected to the server that will
run the application using the database. If the customer wishes to install
several copies of the application, separate deployment licenses are required for
each server computer and each client that will run the particular application.
The Company also licenses its products on a project basis, where the customer
simultaneously purchases development and deployment licenses for an entire
project.
List prices of a development license currently range from $1,500 to
$9,000. List prices of server deployment licenses currently range from
approximately $2,000 for a single user database to over $300,000 for an
application
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with 200 concurrent users. List prices of client deployment licenses vary from
$350 to $2,000 per client, depending on the platform. The Company provides
alternative pricing for "non-interactive" environments where the product is
deeply embedded in a component, such as a telephone switch, and does not have
"end users." The Company licenses the Fault Tolerant Server and Versant SQL
Suite options, and, following completion of Beta testing, expects to license the
Versant Java Direct Interface and Versant Web options. License fees to customers
may vary from list prices depending on a number of factors. Sales through
distributors generally involve a significant discount to list prices. Prices for
project licenses will vary with the scope and nature of the underlying project.
A typical VAR develops an application incorporating the Versant ODBMS and
then licenses the application to its customer. VARs purchase development
licenses from the Company on a per seat basis on terms similar to those of
development licenses sold directly to end-users. VARs are authorized by the
Company to sub-license deployment copies of the Versant ODBMS, together with the
VAR's application, to end-users. Deployment license pricing for sales through
VARs generally is based either on a percentage of the total price charged by the
VAR to its end-user customers or are based on a percentage of the Company's list
prices.
Services
The Company offers a variety of services to assist customers in the
design, development and management of their database applications. Training is
offered in a variety of Versant-specific and object-related technologies and
ranges from beginning to advanced levels. Consulting services are available for
analysis and design assistance, mentoring and technical transfer, application
coding, design reviews and performance analysis. In addition, the Company
provides custom development services to customers who request unique or
proprietary product extensions. These services may be performed by third-party
integrators, consultants or the Company, depending on the nature and complexity
of the request. Maintenance and technical support services are available at an
annual fee typically equal to 15% of the list price of the software. Maintenance
and support contracts, which typically have twelve-month terms, are offered
concurrently with the initial license of a Company product and entitle the
customer to telephone support and to product and documentation updates. For
additional fees, customers may purchase a special support package providing a
dedicated support engineer, and may obtain telephone support available 24 hours
per day. All maintenance contracts are renewable annually.
CUSTOMERS AND APPLICATIONS
As of December 31, 1996, the Versant ODBMS had been licensed by
approximately 600 customers for development and/or deployment in a wide range of
applications. Many of these customers have licensed multiple copies for use in
different applications. Sales to MCI Telecommunications, Sprint and Versant
Europe each represented at least ten percent of the Company's total revenue in
1996.
In any given quarter, it is typical for a relatively small number of
customers to constitute a significant percentage of the Company's total revenue.
In addition, in 1995 and 1996, 51% and 62%, respectively, of the Company's total
revenue were attributable to sales of products and services to
telecommunications companies. *The Company's future performance will depend in
significant part on the continued growth of the use of ODBMSs in
telecommunications applications and the acceptance of the Company's products
within the telecommunications industry. The failure of ODBMSs or the Company's
products to perform favorably in and become an accepted component of
telecommunications applications, or a slower than expected increase or a
decrease in the volume of sales of the Company's products and services to
telecommunications companies, could have a material adverse effect on the
Company.
The following examples illustrate how selected organizations are using the
Versant ODBMS.
Telecommunications. A major telecommunications equipment manufacturer uses
the Versant ODBMS to provide an open, integrated and scalable network management
system. This network management system, designed for telecommunication service
providers, uses the Versant ODBMS to model thousands of high performance,
intelligent network elements, such as switches and routers, as well as their
relationships to one another and permits storage of the entire network topology
and all of its interdependencies as objects in the Versant ODBMS. Complex
network management analysis and decision-making can be accomplished in
significantly less time using the Versant ODBMS rather than traditional database
management system ("DBMS") technologies. For example, when a network element
failure occurs, many traditional systems can require that a network
administrator, through a number of relatively lengthy processes, manually query
multiple network elements to ascertain where the failure occurred and assess the
impact on the remainder of the network. Using the network management system
developed with the Versant ODBMS,
7
<PAGE> 10
a network administrator is automatically notified of the location of the failure
and the network elements and relationships affected. The network management
system's use of the Versant ODBMS also facilitates rapid assimilation of new
software configurations and improvements. System administrators can easily and
transparently incorporate technological improvements into the network management
system by modifying existing objects or incorporating new objects, or can
reconfigure the system to reflect changes in the network.
Internet. Abstract data types are at the heart of many Internet
applications. A large technology integrator used the Versant ODBMS to build a
large multimedia asset management systems so that users from the film,
advertising, news media and publishing industries can access over 250 gigabytes
of on-line video and film archives over a variety of broadband networks. The
system allows users to enter a number of different search criteria including
spatial, temporal and action characteristics and to quickly review video or film
clips that conform to the requested parameters. Using an RDBMS for this
application would have required the decomposition of objects into tables,
severely affecting performance and development time. Another company, a leading
supplier of web servers, is working with Versant to improve search performance
for users inside corporate firewalls. A number of leading Internet service
providers are also working with Versant on projects that reduce network
bandwidth limitations and reduce network latency related to web site update.
Health Care. Like telecommunications, health care is undergoing rapid
change. Deregulation, new technologies and market forces place increasing
pressures on a broad range of health care providers to change the way that they
manage clinical, financial and administrative information. Many health care
providers are replacing decades-old stand-alone information systems with more
capable, networked systems that allow multiple providers to share patient
information quickly and economically. One software developer, in cooperation
with a major pharmaceutical manufacturer and managed care provider, used the
Versant ODBMS to build a "Health Objects Framework," a reusable set of business
objects that holds all patient records, both clinical and financial, and permits
access in a distributed environment regardless of health plan, primary care
physician, pharmacy or patient care facility. The Company believes that this
system is contributing to significant reductions in cost, reduced occurrence of
errors and faster cycle times by integrating clinician-generated prescriptions
with patient records at pharmacies to avoid manual screening for drug
interaction and overmedication problems. The Company believes that this system
also is improving efficiency at long-term care facilities by automating supply
reordering and thereby eliminating costly paper processes.
MARKETING AND SALES
The Company markets and sells the Versant ODBMS in the United States
principally through its direct sales force and VARs and internationally through
its distributors, direct sales force and VARs.
Direct Sales. As of December 31, 1996, the Company's direct sales
organization consisted of 31 employees based at the Company's corporate
headquarters in Menlo Park, California and at its offices in New York City, New
York; Chicago, Illinois; Loveland, Colorado; Dallas, Texas; Alpharetta, Georgia;
Bridgewater, New Jersey; Columbia, Maryland; and Milsons Point, Australia. The
direct sales organization includes a telesales force that supports the Company's
field sales personnel, maintenance renewals and handles smaller orders. The
direct sales organization also includes systems engineers who are able to answer
technical questions and assist customers in running benchmarks against
competitive products and developing prototype applications. In 1995 and 1996,
sales by the Company's direct sales force (including sales to VARs) accounted
for over 90% and 89%, respectively, of the Company's total revenue.
Indirect Sales. An important part of the Company's sales strategy is the
development of indirect distribution channels, such as VARs, systems integrators
and foreign distributors. Typical VARs build application programs in which they
embed a deployment copy of the Versant ODBMS. Systems integrators may include
the Company's products with those of others to provide a complete solution to
their customers. Foreign distributors include Versant Europe as well as
distributors based in Japan, France, Italy and Israel. VARs are typically not
subject to any minimum purchase or resale requirements and can cease marketing
the Company's products at any time. Certain VARs, distributors and systems
integrators also offer competing products that they produce or that are produced
by third parties.
Marketing. The Company conducts marketing programs intended to position
and promote its products and services, including direct mail, advertising,
seminars, trade shows, public relations and distribution of product literature.
The Company also maintains a Web site where prospective customers can obtain
general information about its products, services and distribution partners.
Marketing personnel provide price lists and product descriptive materials,
including white papers, and assist the direct sales force in their efforts
through lead generation and sales
8
<PAGE> 11
training. The marketing department also has a leading role in product marketing
activities, including product management, cooperative positioning and long-term
product direction.
Sales Process. Due in part to the strategic nature of certain Versant
ODBMS applications and magnitude of the associated hardware, networking,
software and consulting expenditures, potential customers are typically cautious
when making product acquisition decisions. For these and other reasons, the
sales cycle for the Company's products to new customers often exceeds six months
and may extend to a year or more. However, for existing customers with
successful deployed applications, sales cycles for new products may not be as
long. During the sales cycle, meetings involving both technical and management
staff are frequently conducted at the customer's site and at the Company's
headquarters. The Company faces significant competition in the DBMS marketplace,
and prospective customers typically perform a detailed technical evaluation or
benchmark of the Versant ODBMS and, often, competitive products, as a part of
the selection process. Upon completion of the evaluation, the customer may
purchase one or more development licenses for the team of programmers that will
build the application. Additionally, the customer may order maintenance,
training courses and assistance from the Company's consultants. While the
customer can purchase a deployment license at the same time as it purchases a
development license, or can purchase a project license that covers development
and deployment for an entire project, most customers defer their purchase of a
deployment license and related maintenance until they complete application
development (a process that typically takes at least six months and can exceed
one year) and then decide to deploy the application. There can be no assurance
that any particular customer will complete the development of an application
successfully, or that, upon completion of development, the customer will decide
to deploy the Versant ODBMS. As additional users are added to a system, the
customer purchases additional deployment licenses, without further deliveries
from the Company, providing additional revenue over an extended period at
relatively low incremental cost to the Company. Depending on the application
type and the customer size, it is possible for the price of a customer's
deployment licenses to substantially exceed the price of its earlier development
licenses.
Sales of Third Party Products. In order to enhance the functionality of
the Versant ODBMS, the Company has offered certain products licensed from third
parties, which are generally offered only in combination with the Versant ODBMS
and are not currently material to the Company's business.
The Company's software is typically shipped to customers shortly after the
execution of a license agreement and upon the Company's receipt of the order. As
a result, the Company typically does not have a material backlog of unfilled
license orders at any given time, and the Company does not consider backlog to
be a meaningful indicator of future performance.
RESEARCH AND DEVELOPMENT
*The Company has committed, and expects to continue to commit, substantial
resources to its research and development efforts. The Company's current
development efforts are focused on improving performance and scalability of the
Versant ODBMS within large-scale run-time environments and enhancing product
functionality to meet customer needs. These efforts include the support of new
object-oriented software development languages, tools and industry standards,
the development of interfaces specifically designed for the storage and
dissemination of complex, non-traditional information on the Internet and
Intranets and the development of tools to provide improved database query
capability and legacy database integration. Research and development expenses
were approximately $2.1 million, $2.0 million and $3.3 million in 1994, 1995 and
1996, respectively. To date, substantially all research and development
expenditures have been expensed as incurred.
The Versant ODBMS has, to date, been almost entirely developed by the
Company's research and development personnel. The Company's development team
consisted of 30 full-time employees as of December 31, 1996, most of whom are
software engineers with significant experience in such technologies as
object-oriented software development, relational database technology, platform
engineering, design and integration and large-scale run-time environments. The
Company selectively supplements its internal staff with outside consultants
having expertise in specific areas. The Company's future success will depend on
its ability to attract, train and retain highly skilled research and development
personnel. Competition for such personnel is intense, especially the competition
for personnel familiar with object-oriented technology. *The Company expects
that such competition will continue for the foreseeable future and may
intensify.
*The Company believes that its future results will largely depend on its
ability to improve its current technologies and to develop new products and
product enhancements on a timely basis. The market for the Company's products
and services is characterized by changing customer demands, rapid technological
change and frequent introductions
9
<PAGE> 12
of new products and product enhancements. Customer requirements for products can
change rapidly as a result of innovations or changes within the computer
hardware and software industries, the introduction of new products and
technologies (including new hardware platforms and programming languages) and
the emergence, evolution or widespread adoption of industry standards. The
actual or anticipated introduction of new products, technologies and industry
standards can render existing products obsolete or unmarketable or result in
delays in the purchase of such products. As a result, the life cycles of the
Company's products are difficult to estimate. *The Company has in the past
experienced delays in the introduction of new products and features, and may
experience such delays in the future. If the Company is unable, for
technological or other reasons, to develop new products or enhancements of
existing products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, operating results and
financial condition will be materially adversely affected.
New products or new versions of existing products may, despite testing,
contain undetected or unresolved errors or bugs that will delay their
introduction or adversely affect their commercial acceptance, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses its
software pursuant to signed license agreements and, to a lesser extent,
"shrink-wrap" licenses displayed in product packaging, which impose certain
restrictions on the licensee's ability to utilize the software. In addition, the
Company seeks to avoid disclosure of its trade secrets, including requiring
those persons with access to the Company's proprietary information to execute
confidentiality agreements with the Company and restricting access to the
Company's source code. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. The Company presently has no patents but has one patent
application pending.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products,
obtain or use information that the Company regards as proprietary or use or make
copies of the Company's products in violation of license agreements. Policing
unauthorized use of the Company's products is difficult. In addition, the laws
of many jurisdictions do not protect the Company's proprietary rights to as
great an extent as do the laws of the United States. In particular,
"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. There can be no assurance that
the Company's means of protecting its proprietary rights will be adequate or
that the Company's competitors will not independently develop similar
technology.
To date, the Company has not been notified that its products infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim that the Company's current or future products infringe
such rights. The Company expects that developers of object-oriented technology
will increasingly be subject to infringement claims as the number of products,
competitors and patents in the Company's industry segment grows. Any such claim,
whether meritorious or not, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements might not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
The Company's future success will depend in part on the Company's ability
to integrate its products with those of vendors providing complementary
products. The Versant ODBMS must be integrated with compilers, development
tools, operating systems and other software and hardware components to produce a
complete end-user solution. There can be no assurance that the Company will
receive the support of these third-party vendors, some of which may compete with
the Company, to integrate the Company's products with the vendors' products.
COMPETITION
The market for the Company's products is intensely competitive and highly
fragmented. The Company believes that the primary competitive factors in its
market include database performance (including the speed at which operations can
be executed and the ability to support large amounts of different information),
vendor reputation, the ability to handle abstract data types and more complex
data relationships, ease of use, database scalability, the
10
<PAGE> 13
reliability, availability and serviceability of the database, compatibility with
customers' existing technology platforms and the ease and speed with which
applications can be developed, price and service and support.
The Company's current and prospective competitors include companies that
offer a variety of database solutions using various technologies including
object database, object-relational database and relational database
technologies. Competitors offering object and object-relational database
management systems include Object Design, Inc., Informix and its Illustra
Information Technologies, Inc. subsidiary, Objectivity, Inc., Gemstone Systems,
Inc., Poet Software Corporation, O2 Corp., ONTOS, Inc., and Fujitsu America,
Inc. In addition, the Company's products compete with traditional relational
database management systems, many of which have been or are expected to be
modified to incorporate object-oriented interfaces and other functionality. The
principal competitors in the relational database market are Oracle, Sybase,
Informix, IBM and Microsoft. *The Company expects to face additional competition
from other established and emerging companies as the object database market
continues to develop and expand. New or enhanced products introduced by existing
or future competitors could increase the competition faced by the Company's
products, and each of Informix, IBM, Microsoft and Oracle has either announced
the development of, or has introduced, enhanced versions of its principal
database products that are intended to improve the performance or expand the
capabilities of its existing products to support object-oriented applications.
In addition, Computer Associates has announced its acquisition of object
database management technology and its intention to offer an ODBMS product.
Although the Company believes that the decision of relational database vendors
to pursue object-relational or object-oriented approaches validates the
Company's belief that object-oriented database solutions will be increasingly
demanded by today's business organizations, the heightened competition that the
Company expects to face could result in fewer customer orders, price reductions,
reduced transaction size, reduced gross margins and loss of market share, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition and on the market price of the Company's Common
Stock. The Company believes that the Versant ODBMS is currently more expensive
than typical RDBMSs, and there can be no assurance that the Company will be able
to maintain prices for its products at levels that will enable the Company to
market its products profitably. Any decrease in per unit prices, as a result of
competition or otherwise, could have a material adverse effect on the Company's
business, operating results and financial condition.
Many of the Company's competitors 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 the Company. In addition, many of the
Company's competitors have well-established relationships with current and
potential customers of the Company. As a result, the Company's 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. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures will not have a material
adverse effect on its business, operating results and financial condition.
EMPLOYEES
As of December 31, 1996, the Company had a total of 103 employees, 98 of
whom were based in the United States and 5 of whom were based in Australia. Of
the total, 51 were engaged in engineering and technical services, 41 were
engaged in sales and marketing and 11 were engaged in administration and
finance. None of the Company's employees is represented by a labor union with
respect to his or her employment by the Company. The Company has experienced no
organized work stoppage to date, and believes that its relationship with its
employees is good.
*The Company's future performance depends in significant part upon the
continued service of its key technical, sales and senior management personnel.
The loss of the services of one or more of the Company's key employees could
have a material adverse effect on the Company's business, operating results and
financial condition. *The Company's future success also depends on its
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 the Company's headquarters are located, and
there can be no assurance that the Company will be able to attract, train and
motivate such personnel.
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<PAGE> 14
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing and research and
development facility occupies approximately 16,875 square feet in Menlo Park,
California under a lease that expires in August 1997. In February 1997, the
Company signed a 10-year lease for a facility under construction of
approximately 54,000 square feet in Fremont, California that it expects to
occupy prior to the expiration of its current facility lease and after
completion of exterior and interior improvements. The Company believes that the
Fremont facility will be adequate for its requirements for several years. The
Company also leases space for sales offices, generally under one year operating
lease agreements, in New York City, New York; Chicago, Illinois; Loveland,
Colorado; Dallas, Texas; Bridgewater, New Jersey; Alpharetta, Georgia; Columbia,
Maryland; and Milsons Point, Australia.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information for Common Stock
The Company's common stock is traded on the National Market System of the
Nasdaq Stock Market, Inc. ("Nasdaq") under the symbol "VSNT." The Company
completed its initial public offering on July 18, 1996. Prior to July 18, 1996,
there was no public trading market for the Company's Common Stock. The following
table reflects the range of high and low sales prices of the Company's Common
Stock for the last two quarters of 1996. This information is based on closing
prices as reported by Nasdaq.
<TABLE>
<CAPTION>
1996
HIGH LOW
---- ---
<S> <C> <C>
Third Quarter*................ $27.625 $ 8.000
Fourth Quarter................ $24.000 $15.875
</TABLE>
* Commencing July 18, 1996
Stockholders
As of February 28, 1997, there were approximately 206 shareholders of
record of the Company's Common Stock. The Company believes that a significant
number of beneficial owners of its Common Stock hold their shares in street
name. Based on information available to the Company, the Company believes it has
at least 500 beneficial shareholders of its Common Stock.
Dividends
The Company has neither declared nor paid cash dividends on its Common
Stock in the past. The Company intends to retain future earnings, if any, to
fund development and growth of its business and, therefore, does not anticipate
that it will declare or pay cash dividends on its Common Stock in the
foreseeable future.
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<PAGE> 16
ITEM 6. 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 Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. These forward-looking
statements are subject to certain risks and uncertainties, including those
discussed in this Annual Report on Form 10-KSB, including in "Other Factors That
May Affect Future Operating Results" 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 section of the Annual
Report which contain such forward looking statements, and words such as
"believes", "expects", "may", "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. The section
entitled "Other Factors That May Affect Future Operating Results," which has a
substantial number of forward-looking statements, has not been asterisked for
improved readability. The Company undertakes no obligation to revise or update
any forward-looking statements to reflect events or circumstances that may arise
after the date of this report.
The following table presents Statement of Operations Data for the five
years ended December 31, 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
License $ 12,202 $ 7,810 $ 5,649 $ 2,485 $ 837
Services 6,191 4,067 2,590 3,526 2,997
-------- -------- -------- -------- --------
Total revenue 18,393 11,877 8,239 6,011 3,834
-------- -------- -------- -------- --------
Cost of revenue:
License 1,144 1,062 930 276 116
Services 2,987 2,258 1,563 906 2,193
-------- -------- -------- -------- --------
Total cost of revenue 4,131 3,320 2,493 1,182 2,309
-------- -------- -------- -------- --------
Gross profit 14,262 8,557 5,746 4,829 1,525
-------- -------- -------- -------- --------
Operating expenses:
Marketing and sales 8,327 6,319 5,710 4,060 4,444
Research and development 3,323 2,048 2,063 2,334 2,611
General and administrative 1,501 1,419 1,093 1,098 1,094
-------- -------- -------- -------- --------
Total operating expenses 13,151 9,786 8,866 7,492 8,149
-------- -------- -------- -------- --------
Income (loss) from operations 1,111 (1,229) (3,120) (2,663) (6,624)
-------- -------- -------- -------- --------
Interest income and other, net 429 70 117 131 270
Income (loss) before taxes 1,540 (1,159) (3,003) (2,532) (6,354)
-------- -------- -------- -------- --------
Provision for income taxes 129 73 56 99 19
-------- -------- -------- -------- --------
Net income (loss) $ 1,411 $ (1,232) $ (3,059) $ (2,631) $ (6,373)
======== ======== ======== ======== ========
Net income per share $ 0.18
========
Pro forma net loss per share (1) $ (0.21)
========
Shares used in per share calculations 7,781 5,933
======== ========
</TABLE>
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of pro forma net loss per share.
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<PAGE> 17
OVERVIEW
Versant was incorporated in August 1988 and commenced commercial shipments
of its principal product, the Versant ODBMS, in 1991. Since that time,
substantially all of the Company'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 released Version 4.0 of the Versant
ODBMS in July 1995 and released Version 5.0 in March 1997. *The Company
currently expects that licenses of the Versant ODBMS and peripheral products,
including the Versant SQL Suite, the Versant Java Direct Interface and Versant
Web, 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. *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 1995 and
1996, three customers accounted for approximately 43% and 49% of the Company's
total revenue, respectively. Further, in 1995 and 1996 approximately 50% and
62%, respectively, of the Company's total revenue was derived from customers in
the telecommunications industry. *The Company expects that sales to
telecommunications customers will continue to represent a majority of the
Company's total revenue in 1997. However, there can be no assurance that the
Company will earn comparable revenue from these customers or this industry in
future periods.
The Company licenses its products directly to end-users principally
through three types of licenses -- development licenses, deployment server
licenses and deployment client licenses. Development licenses are sold on a "per
seat" basis and authorize the customer to develop an application program that
uses the Versant ODBMS. Before a customer may deploy an application, it must
purchase at least one deployment server license and one deployment client
license for each computer connected to the server that will run the application
using the database management system. If the customer wishes to install several
copies of the application, separate deployment licenses are required for each
server computer and each client that will run the particular application.
Pricing of the Versant ODBMS 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, the
Company offers deployment licenses priced on a "per user" basis. The Company
also licenses its products on a project basis, where the customer simultaneously
purchases development and deployment licenses for an entire project. *The
Company believes that project licenses will represent an increasing portion of
its licenses in the future. *Although project licenses reduce the risk that a
given customer will not purchase deployment licenses after purchasing
development licenses, the total license fee paid for a project license may be
less than the Company would have received had the customer purchased development
and deployment licenses separately. *Additionally, the Company's increasing use
of project licenses may also result in the Company recognizing revenue earlier
than it might have otherwise.
VARs purchase development licenses from the Company on a per seat basis,
on terms similar to those of development licenses sold directly to end users.
VARs are authorized by the Company to sub-license deployment copies of the
Versant ODBMS, together with the VAR's application, to end-users. Deployment
license pricing for sales through VARs generally represents either a percentage
of the total price charged by the VAR to its end-user customers or a percentage
of the Company's list prices.
The Company's development and deployment license agreements and agreements
with VARs typically require the payment of a nonrefundable, one-time license fee
for a license of perpetual term. Revenue from perpetual license agreements is
recognized 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 deemed probable. In instances in which
a significant vendor obligation exists, revenue recognition is delayed until
such obligation has been satisfied. If an acceptance period is required, revenue
is recognized upon the earlier of customer acceptance or the expiration of the
acceptance period. Maintenance revenue is recognized ratably over the term of
the maintenance contract, which is typically twelve months. Training and
consulting revenue is recognized when a customer's order has been received and
the services have been performed. 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 generally is recognized using the percentage-of-completion
method of accounting. Amounts received from customers under certain license,
maintenance and nonrecurring engineering agreements involving significant
continuing obligations of the Company are included on the Company's balance
sheet as deferred revenue.
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<PAGE> 18
The Company sells the Versant ODBMS and peripheral products, Associated
Services and Third-Party Products primarily through its direct sales force to
end-user customers and VARs and, to a lesser extent, through foreign
distributors. Through late 1993, the Company focused its sales efforts on
developing indirect sales channels and contracting for nonrecurring engineering
fees from its marketing partners. In late 1993, the Company changed its sales
strategy to a direct sales model and began increasing the size of its direct
sales force. In 1995 and 1996, sales by the Company's direct sales force
(including sales through VARs) accounted for more than 90% and 89%,
respectively, of the Company's total revenue.
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. In
March 1997, the Company exercised its option to acquire Versant Europe. *This
acquisition, in which Versant will pay approximately $3.6 million in cash and
stock, will be accounted for as a purchase. In 1996, which was Versant Europe's
first full year of operations, Versant Europe had revenues of $1.4 million and a
net loss of $1.9 million. The Company received $1.9 million in revenue and
royalties from Versant Europe in 1996. As of February 28, 1997, Versant Europe
had 28 employees and consultants.
Since inception, the Company has invested significant resources in
developing the Versant ODBMS and in building the Company's sales, marketing,
consulting and administrative organizations. *The Company expects to hire
additional personnel in all of these functional areas and increase its promotion
and selling expenditures during 1997. The labor market in which the Company
operates is highly competitive, and there can be no assurance that key employees
can be employed or retained without substantial increases in the Company's
operating expenses.
16
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data expressed as
percentages of total revenue for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue:
License 66.3% 65.8% 68.6%
Services 33.7 34.2 31.4
------ ------ ------
Total revenue 100.0 100.0 100.0
Cost of revenue:
License 6.2 9.0 11.3
Services 16.3 19.0 18.9
------ ------ ------
Total cost of revenue 22.5 28.0 30.2
Gross margin 77.5 72.0 69.8
Operating expenses:
Marketing and sales 45.3 53.2 69.3
Research and development 18.1 17.2 25.0
General and administrative 8.1 12.0 13.3
------ ------ ------
Total operating expenses 71.5 82.4 107.6
Income (loss) from operations 6.0 (10.4) (37.8)
------ ------ ------
Interest income and other, net 2.4 0.6 1.4
Income (loss) before taxes 8.4 (9.8) (36.4)
Provision for income taxes 0.7 0.6 0.7
------ ------ ------
Net income (loss) 7.7% (10.4)% (37.1)%
====== ====== ======
</TABLE>
Revenue
Total revenue increased 44% from $8.2 million in 1994 to $11.9 million in
1995 and an additional 55% to $18.4 million in 1996.
License revenue increased 38% from $5.6 million in 1994 to $7.8 million in
1995 and an additional 56% to $12.2 million in 1996. The increase in license
revenue during 1995 compared to 1994 was attributable principally to a larger
and more experienced direct sales force as well as the release of Version 4.0 of
the Versant ODBMS in July 1995. The increase in license revenue during 1996
compared to 1995 was attributable principally to an increased number of license
sales, significant revenue from deployment licenses sold to several
telecommunications companies and sales to Versant Europe. In addition, in 1996,
Versant began receiving revenues from the Internet/Intranet market. *The Company
expects license revenue to increase in 1997 in absolute dollar terms due to
increased license purchases by telecommunications, Internet/Intranet and other
customers, and the receipt of gross revenues, rather than royalties, from the
sale of licenses by Versant Europe, as a result of the acquisition of Versant
Europe. *The Company also believes that license revenue as a percentage of total
revenue will remain flat or increase in 1997 compared to 1996. However, due to
risks highlighted in the section, "Other Factors That May Affect Future
Operating Results," below, there can be no assurance that license revenue will
increase or remain level, in absolute dollar terms or as a percentage of total
revenue, in 1997 when compared to 1996.
Services revenue increased 57% from $2.6 million in 1994 to $4.1 million
in 1995 and an additional 52% to $6.2 million in 1996. The increase in services
revenue during 1995 compared to 1994 was attributable principally to increased
maintenance revenue from a larger installed base, substantial growth in the
Company's training and consulting business with end-user customers and
nonrecurring engineering fees from two porting contracts with large end-user
customers. The increase in services revenue during 1996 compared to 1995 was
attributable principally to increased maintenance revenue from a significantly
larger installed base and substantial growth in training and consulting revenue,
offset in part by a decrease in nonrecurring engineering fees. *The Company
expects services revenue to increase in absolute dollar terms, attributable
principally to increased maintenance and training and
17
<PAGE> 20
consulting revenue; and for services revenue to remain flat or decline as a
percentage of total revenue in 1997. Due to risks highlighted in the section,
"Other Factors That May Affect Future Operating Results," below, there can be no
assurance that services revenue will increase in absolute dollar terms, or
remain flat or decrease as a percentage of total revenue, in 1997 when compared
to 1996.
Export revenue decreased by 5% from $3.7 million in 1994 to $3.5 million
in 1995 and then increased by 20% to $4.2 million in 1996. The decrease in
export revenue during 1995 compared to 1994 resulted from the conclusion of
nonrecurring engineering contracts with international OEMs in 1994. The increase
in export revenue during 1996 compared to 1995 resulted primarily from higher
sales to Versant Europe and Australia. *The Company intends to continue to
expand its sales and marketing activities outside the United States, which will
require significant management attention and financial resources. The Company's
export sales are currently denominated predominantly in United States dollars.
However, an increase in the value of the United States dollar relative to
foreign currencies could make the Company's products more expensive and,
therefore, less competitive in foreign markets. The Company believes that the
increase in the value of the United States dollar relative to foreign currencies
in 1996 did not have a material effect on the Company's operating results. *As
the Company increases its international sales, its total revenue will be
affected to a greater extent by seasonal fluctuations resulting from lower sales
levels that typically occur during the summer months in Europe and other parts
of the world. Export revenue as a percentage of total revenue decreased from 45%
in 1994 to 30% in 1995 to 23% in 1996. *With the Company's recent decision to
acquire Versant Europe and the Company's increased emphasis on international
sales, the Company expects export revenue to increase as a percentage of total
revenues; however, there can be no assurance that export revenue will grow
faster than domestic revenue, if at all.
Cost of Revenue
Total cost of revenue increased by 33% from $2.5 million in 1994 to $3.3
million in 1995 and increased an additional 24% to $4.1 million in 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, product
packaging, freight, user manuals, product media, production labor costs and
reserves for estimated bad debts. Cost of license revenue increased by 14% from
$930,000 in 1994 to $1.1 million in 1995 and remained level at $1.1 million in
1996. The increases in cost of license revenue during 1995 compared to 1994 were
principally attributable to overall growth in license revenue. Cost of license
revenue during 1996 compared to 1995 remained level as costs related to overall
growth in license revenue and additions to bad debt reserves were offset by
reduced royalty obligations from lower sales of Third Party Products. *The
Company believes, based on its decision not to renew its relationship with
Miramar and its reduced reliance on Third Party Products due to the integration
of additional functionality into version 5.0 of the Versant ODBMS and related
peripheral products, Versant SQL Suite, Versant Java Direct Interface and
Versant Web, that its royalty obligations will not be significant in 1997 and
that cost of license revenue will decrease as a percentage of license revenue.
However, there can be no assurance that the Company will not seek licenses for
other Third Party Products in the future, which may require the Company to pay
royalties to third parties, which could cause cost of license revenue to
increase as a percentage of license revenue.
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 by
44% from $1.6 million in 1994 to $2.3 million in 1995 and an additional 32% to
$3.0 million in 1996. The increase during 1995 compared to 1994 was attributable
principally to increased training and consulting business, as well as costs
associated with a large nonrecurring engineering project, a significant portion
of which was performed by a subcontractor. The increase during 1996 compared to
1995 was attributable principally to a significant increase in training and
consulting business, as well as costs associated with customer support
activities to service a growing customer base offset by a reduction in
subcontractor cost. *The Company expects that cost of services revenue as a
percentage of services revenue will remain flat in 1997 given the relatively
fixed nature of the cost and revenue components of additional maintenance and
training and consulting projects. *However, the Company may experience increased
compensation pressure as a result of the intense demand for managers and
engineers in Silicon Valley. *If such compensation pressures result in increased
compensation expense to the Company and the Company is not able to increase the
fees the Company charges for maintenance and training and consulting projects,
whether as a result of competitive pressures, restrictions in contractual
provisions regarding Associated Services or otherwise, the Company's cost of
services revenue would increase as a percentage of services revenue.
18
<PAGE> 21
Operating Expenses
Marketing and Sales. Marketing and sales expenses consist primarily of
marketing and sales personnel costs, including sales commissions, recruiting and
travel, advertising, public relations, seminars, trade shows, lead generation,
product descriptive literature, product management, sales offices, mailings and
depreciation expense. Marketing and sales expenses increased by 11% from $5.7
million in 1994 to $6.3 million in 1995 and by an additional 32% to $8.3 million
in 1996. The increase during 1995 compared to 1994 was principally attributable
to the costs of recruiting new executives for marketing and sales functions and
increased compensation and other costs of a larger direct sales force. The
increase during 1996 compared to 1995 was from costs associated with higher
compensation including increased sales commissions related to increased revenue,
increased costs of the Company's annual sales training conference and the
expansion of the direct sales force. *Although marketing and sales expenses
decreased as a percentage of total revenue in 1996 compared to 1995, the Company
expects that marketing and sales expenses will at least remain flat and may
increase as a percentage of total revenue as the Company continues to expand its
direct sales force and to promote the use of the Company's technology in the
Internet/Intranet market, and as a result of the acquisition of Versant Europe.
Research and Development. Research and development expenses consist
primarily of salaries, recruiting and other personnel-related expenses,
depreciation of development equipment, supplies and travel. Research and
development expenses decreased slightly from $2.1 million in 1994 to $2.0
million in 1995 and increased by 62% to $3.3 million in 1996. The decrease
during 1995 compared to 1994 was principally the result of reduced overall
Company overhead and also the percentage of that overhead allocated to research
and development. The increase during 1996 compared to 1995 resulted primarily
from increases in compensation, recruiting expense associated with headcount
growth allotted to new product development and costs of consultants used to
supplement the efforts of Company software engineers in porting the Company's
products to additional platforms, and increased depreciation, amortization and
equipment expense, as well as the cost of initiating the Company's ISO 9000
training and certification program. The Company believes that a significant
level of research and development expenditures is required to remain competitive
and complete products under development. *Accordingly, the Company anticipates
that it will continue to devote substantial resources to research and
development. To date, nearly all research and development expenditures have been
expensed as incurred.
General and Administrative. 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, audit and public reporting costs. General and
administrative expenses increased 30% from $1.1 million in 1994 to $1.4 million
in 1995 and a small additional amount to $1.5 million in 1996. The increase
during 1995 compared to 1994 resulted from the cost of litigating an
intellectual property matter settled during 1995 as other general and
administrative expenses in the aggregate remained relatively unchanged. The
small increase during 1996 compared to 1995 was attributable principally to
higher compensation, liability insurance and other public company reporting
costs, recruiting, publications, printing and maintenance costs offset by lower
legal fees resulting from the 1995 settlement of litigation as well as lower
depreciation and equipment costs. *Although general and administrative expenses
decreased as a percentage of total revenue in 1996 when compared to 1995, the
Company expects general and administrative expenses to increase as a percentage
of total revenue in 1997, principally attributable to the administration and
finance costs that will be incurred following the acquisition of Versant Europe,
increased costs associated with the Company's status as a public company and
increased costs incurred in connection with the Company's move to a new and
larger facility.
Interest Income and Other, Net
Interest income represents income earned on the Company's cash, cash
equivalents and short-term investments. Interest income declined from $134,000
in 1994 to $75,000 in 1995, and then increased to $367,000 in 1996 as a result
of proceeds from the Company's initial public offering and other cash balances
being available for investment during the last two quarters of 1996. In 1996,
the Company also received proceeds of $120,000 from the settlement of a
contractual dispute. Interest expense, which partially offset interest income in
each of 1994, 1995 and 1996 and is principally related to leases of capital
equipment and bank loans, was $17,000 in 1994, $5,000 in 1995 and $58,000 in
1996.
Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Company incurred net operating losses in 1994 and 1995 resulting in no federal
or state tax payments based on income. The Company had net income of $1.4
million for 1996 and has
19
<PAGE> 22
provided an income tax provision of $129,000 for anticipated federal and state
income taxes of $115,000 not covered by net operating loss carryforwards and
federal withholding taxes of $14,000. The Company also paid foreign withholding
taxes during 1994 and 1995, which are included within the income tax provision
but were not material in any given year.
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of $17.0 million and $5.4 million, respectively, and tax credit
carryforwards of $1.1 million, all of which expire through 2010. *Due to the
Company's history of operating losses through 1995 and other factors, the
Company believes that there is sufficient uncertainty regarding the
realizability of these carryforwards, and therefore a valuation allowance of
approximately $8.2 million has been recorded against the Company's net deferred
tax assets of approximately $8.2 million. Management will continue to assess the
realizability of the tax benefits available to the Company based on actual and
forecasted operating results. Due to the "change in ownership" provisions of the
Internal Revenue Code of 1986, the availability of net operating loss
carryforwards and tax credit carryforwards to offset federal taxable income in
future periods is subject to an annual limitation if a change in ownership for
income tax purposes should occur. A change in ownership of the Company occurred
in 1992, and again, as a result of the Company's initial public offering, in
1996, and the Company's ability to utilize its net operating loss carryforwards
and credit carryforwards available on those dates was restricted.
Earnings Per Share
The Company's earnings per share for 1996 was $0.18. This was based on a
weighted average outstanding number of shares of 7,781,000. This weighted
average number reflects the fact that the shares issued in the company's initial
public offering were only outstanding for approximately half of the year. The
Company had 8,719,000 shares outstanding as of December 31, 1996. *In connection
with the acquisition of Versant Europe, the Company expects to issue
approximately 167,545 shares of Common Stock to the owner of Versant Europe in
March 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity during the last two quarters of
1996 was the $14.9 million in equity financing received from its initial public
offering of Common Stock. The Company's primary sources of liquidity during
1994, 1995 and the first two quarters of 1996 were through private sales of
equity securities and, to a much lesser extent, capital equipment leases and a
bank line of credit.
The Company's operating activities provided $2.9 million in net cash
during 1996 primarily as a result of profitable operations and increases in
deferred revenue principally from sales of maintenance, partially offset by an
increase in accounts receivable balances. The Company used $3.2 million during
1994 and $2.2 million in net cash in operations during 1995, primarily to fund
operating losses and to finance increases in accounts receivable.
In 1994, 1995 and 1996, the Company purchased property and equipment of
$316,000, $354,000 and $697,000, respectively, consisting primarily of computer
workstations, desktops, laptops and computer software used for product
development, product demonstrations, customer benchmarks, customer support and
administrative activities. *In 1997, the Company expects purchases of property
and equipment to increase as a result of the Company's move to a new and larger
headquarters, for which the Company may be obligated to pay certain construction
costs, and to a lesser extent, due to the Company's projected increase in
personnel.
At December 31, 1996, the Company had $20.0 million in cash, cash
equivalents and short-term investments and approximately $18.9 million in
working capital. The Company also maintains a revolving credit line with a bank
that expires in June 1997. 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 subject to the
Company meeting certain net profit and tangible net worth tests. These
borrowings bear interest at a rate of 1/2% 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. At
December 31, 1996, the Company's commitments for capital expenditures were not
material.
*The Company believes that its current cash, cash equivalent and
short-term investment balances, its lines of credit and the net cash generated
by operations, if any, will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures for at least the next twelve months.
*If cash generated by operations is insufficient to satisfy the Company's
liquidity requirements, the Company may seek additional debt or equity
financing. There can
20
<PAGE> 23
be no assurance that such financing will be available on terms acceptable to the
Company. The sale of additional equity or convertible debt securities could
result in dilution to the Company's shareholders. *A portion of the Company's
cash may be used to acquire or invest in complementary businesses or products or
to obtain the right to use complementary technologies. From time to time, the
Company evaluates potential acquisitions of such businesses, products or
technologies. The Company has no current plans, agreements or commitments
(except with respect to its acquisition of Versant Europe) with respect to any
acquisition, and the Company is not currently engaged in any negotiations with
respect to any such transaction. *In connection with the acquisition of Versant
Europe, the Company expects to pay the owner of Versant Europe $2.0 million in
cash in March 1997.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Annual Report on Form 10-KSB contains forward-looking statements that
involve risks and uncertainties, including, but not limited to, those set forth
below, that could cause actual results to differ materially from those in the
forward-looking statements. The matters set forth below should be carefully
considered when evaluating the Company's business and prospects.
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 of the
Company's control. These factors include domestic and foreign demand for the
Company's products and services, particularly in the telecommunications,
Internet/Intranet and financial services markets, the size, timing and structure
of significant license purchases by customers, the decisions of significant
customers regarding whether to deploy the Versant ODBMS on a large scale basis,
new product introductions by the Company and its competitors, the ability of
relational and object-relational database vendors to extend the capabilities of
their existing products to support object-oriented applications, the
publications of opinions about the Company and its competitors and their
respective products, changes in pricing policies by the Company or its
competitors and customer order deferrals in anticipation of product enhancements
or new product offerings by the Company or its competitors. The Company's
expense levels are relatively fixed and are based in significant part on
expectations of future revenue. Consequently, if revenue levels are below
expectations, net income is likely to be disproportionately adversely affected.
A number of other factors make it impossible to predict the Company's
operating results for any period prior to the end of that period. The Company's
software is typically shipped to a customer shortly after the Company's receipt
of the customer's order, and consequently, order backlog at the beginning of any
quarter has in the past represented little or none of that quarter's expected
license revenue. As a result, license revenue in any quarter is substantially
dependent on orders booked and shipped in that quarter. Historically, a majority
of the Company's total 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 that quarter, and the Company expects this trend to continue. 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, and the timing of such orders and their fulfillment has caused,
and is likely to cause in the future, material fluctuations in the Company's
operating results, particularly on a quarterly basis. For example, in 1996, one
customer accounted for 28% of the Company's total revenue, and the Company's
three largest customers accounted for 49% of the Company's 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. Due in part
to the strategic nature of the Company's products and associated expenditures,
potential customers are typically cautious in making product acquisition
decisions. The decision to license the Company's products generally requires the
Company to provide a significant level of education to prospective customers
regarding the uses and benefits of the Company's products, and the Company must
frequently commit pre-sales support resources, such as assistance in performing
bench marking and application prototype development. Because of the lengthy
sales cycle and the relatively large average dollar size of individual licenses,
a lost or delayed sale could have a significant impact on the Company's
operating results for a particular period. Moreover, to the extent that
significant sales occur earlier than expected, operating results for the
subsequent quarters may be adversely affected. For example. a substantial
portion of the licenses purchased by the Company's largest customer in 1996 are
for non-specified future use, and accordingly, the amount of revenue that the
Company receives from such customer in 1997, if any, may be adversely affected
by the pre-existing license rights already owned by such customer.
Many of the Company's competitors 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 the Company. In addition, many of the
Company's competitors have well-established
21
<PAGE> 24
relationships with current and potential customers of the Company. Recently,
some of the Company's larger competitors appear to be directing larger amounts
of resources to the object-oriented database area. For example relational
database vendors have attempted to address some of the shortcomings of RDBMSs by
"extending" their support for abstract data types with object-relational
approaches. An example of one approach is the Informix Universal Server, which
requires a type of extension called a "data blade" for each date type stored.
These data blades perform the operation of helping the relational engine
understand data types not intended for relational storage. The Company expects
to face additional competition from other established and emerging companies as
the object database market continues to develop and expand. Increased
competition could result in fewer customer orders, price reductions, reduced
transaction size, reduced gross margins and loss of market share, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. In 1995 and 1996 approximately 51% and 62%
respectively, of the Company's total revenues were derived from customers in the
telecommunications industry. The Company's future performance will depend in
significant part on the continued growth of the use of ODBMSs in
telecommunications applications and the acceptance of the Company's products
within the telecommunications industry. The failure of the Company's products to
perform favorably in and become an accepted component of telecommunications
applications, a slower than expected increase or a decrease in the volume of
sales of the Company's products and services to telecommunications companies, or
a general slowdown in the telecommunications industry, could have a material
adverse effect on the Company.
The Company's future success will also depend on the acceptance of the
Company's products for use in new applications, such as the Internet/Intranet
market, and other vertical markets such as financial services and health care.
The market for applications and commercial products for the Internet/Intranet
market is continuing to develop, is rapidly changing, and is characterized by an
increasing number of new entrants whose products may compete with those of the
Company. As a result, it is difficult to predict the future growth of this
market, and there can be no assurance that a viable Internet/Intranet market for
object-oriented databases will develop and be sustainable, or that the Company
will be successful in attaining a significant share of such market.
The Company's future success will depend in significant part upon the
continued services of its key technical, sales and senior management personnel,
including its president and chief executive officer, David Banks. None of the
Company's officers is bound by an employment or non-competition agreement with
the Company, and accordingly any such officer can terminate his relationship
with the Company at any time.
The Company's management systems and resources have been placed under
significant strain as a result of the Company's recent growth. This strain is
likely to continue as the Company seeks to integrate Versant Europe into its
operations and moves its corporate headquarters in 1997. The Company's ability
to manage these changes effectively will require it to continue to improve its
operational, financial and management systems, and to attract and retain highly
qualified personnel. There can be no assurance that the Company will be able to
make any such improvements in an effective or timely manner or that such
improvements will be adequate.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data required by Item 7 are
set forth below on pages F-1 to F-17 of this report.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
22
<PAGE> 25
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information concerning the Company's directors required by this
Item is incorporated by reference to the Company's definitive Proxy Statement
for its 1997 Annual Meeting of Shareholder (the "Proxy Statement") under the
heading "Election of Directors." The information concerning the Company's
executive officers required by this Item is incorporated by reference to the
Proxy Statement under the heading "Executive Officers."
The section entitled "Compliance under Section 16(a) of the Securities
Exchange Act of 1934" appearing in the Proxy Statement sets forth the
information concerning compliance by officers, directors and 10% shareholders of
the Company with Section 16 of the Exchange Act and is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Proxy Statement under the heading "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Proxy Statement under the heading "Certain Relationships and Related
Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index, page X-1.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last
quarter of the year for which this report is filed.
With the exception of the information incorporated herein by reference
to the Proxy Statement in Items 9, 10, 11 and 12 of Part III, the Proxy
Statement is not deemed to be filed with this Report.
23
<PAGE> 26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Menlo Park, State of California, on
this 28th day of March, 1997.
VERSANT OBJECT TECHNOLOGY CORPORATION
By: /s/ Richard I. Kadet
------------------------------------------
Richard I. Kadet
Vice President-Finance and Administration
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ David Banks President and Chief March 28, 1997
- ---------------------------------- Executive Officer
David Banks
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Richard I. Kadet Vice President-Finance March 28, 1997
- ---------------------------------- and Administration
Richard I. Kadet
ADDITIONAL DIRECTORS:
/s/ Mark Leslie Director March 28, 1997
- ----------------------------------
Mark Leslie
/s/ Stephen J. Gaal Director March 28, 1997
- ----------------------------------
Stephen J. Gaal
/s/ Lawrence K. Orr Director March 28, 1997
- ----------------------------------
Lawrence K. Orr
/s/ James Simpson Director March 28, 1997
- ----------------------------------
James Simpson
</TABLE>
24
<PAGE> 27
VERSANT OBJECT TECHNOLOGY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
Report of Independent Public Accountants .............................. F-2
Consolidated Balance Sheets ........................................... F-3
Consolidated Statements of Operations ................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit) ............. F-5
Consolidated Statements of Cash Flows ................................. F-6
Notes to Consolidated Financial Statements ............................ F-7 to
F-16
Schedule II - Valuation and Qualifying Accounts and Reserves........... F-17
F-1
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Versant Object Technology Corporation:
We have audited the accompanying balance sheets of Versant Object Technology
Corporation (a California corporation) as of December 31, 1996 and 1995, and the
related statements of operations, shareholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Versant Object Technology
Corporation as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange Commission
rules and is not a part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 22, 1997 (Except for Note 11, as to which the date is March 19, 1997)
F-2
<PAGE> 29
VERSANT OBJECT TECHNOLOGY CORPORATION
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,267 $ 1,281
Short-term investments 14,716 --
Accounts receivable, net of allowance for doubtful
accounts of $603 in 1996 and $81 in 1995 4,747 4,025
Other current assets 198 561
-------- --------
Total current assets 24,928 5,867
Property and equipment, net 675 365
Deposits 85 91
-------- --------
$ 25,688 $ 6,323
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capitalized lease obligations $ 226 $ 27
Accounts payable 475 193
Accrued liabilities 2,374 2,235
Deferred revenue 2,811 1,864
Accrued income taxes 115 --
-------- --------
Total current liabilities 6,001 4,319
-------- --------
Long-term liabilities, net of current portion:
Capitalized lease obligations 413 74
Deferred rent -- 39
-------- --------
Total long-term liabilities 413 113
-------- --------
Commitments
Mandatorily redeemable convertible preferred stock -- 4,429
Shareholders' equity (deficit):
Preferred stock:
Authorized - 3,000 shares
None issued and outstanding -- --
Common stock:
Authorized -- 30,000 shares
Issued and outstanding -- 8,719 in 1996 and 3,139 in 1995 40,889 20,488
Accumulated deficit (21,615) (23,026)
-------- --------
Total shareholders' equity (deficit) 19,274 (2,538)
-------- --------
$ 25,688 $ 6,323
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 30
VERSANT OBJECT TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue:
License $ 12,202 $ 7,810 $ 5,649
Services 6,191 4,067 2,590
-------- -------- --------
Total revenue 18,393 11,877 8,239
-------- -------- --------
Cost of revenue:
License 1,144 1,062 930
Services 2,987 2,258 1,563
-------- -------- --------
Total cost of revenue 4,131 3,320 2,493
-------- -------- --------
Gross profit 14,262 8,557 5,746
Operating expenses:
Marketing and sales 8,327 6,319 5,710
Research and development 3,323 2,048 2,063
General and administrative 1,501 1,419 1,093
-------- -------- --------
Total operating expenses 13,151 9,786 8,866
Income (loss) from operations 1,111 (1,229) (3,120)
-------- -------- --------
Interest income and other, net 429 70 117
-------- -------- --------
Income (loss) before taxes 1,540 (1,305) (3,115)
Provision for income taxes 129 73 56
-------- -------- --------
Net income (loss) $ 1,411 $ (1,232) $ (3,059)
======== ======== ========
Net income per share $ 0.18
========
Pro forma net loss per share $ (0.21)
========
Weighted average common and common
equivalent shares 7,781 5,933
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 31
VERSANT OBJECT TECHNOLOGY CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Total
-------------------- Accumulated Shareholders'
Shares Amount Deficit Equity (Deficit)
-------------------- ------------ ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 369,092 $ 1,484 $ (18,735) $ (17,251)
Exercise of stock options 64,896 18 -- 18
Conversion of Series A, B, C and D
preferred stock to common stock
on a one-for-one-share basis 2,327,273 18,669 -- 18,669
Net loss -- -- (3,059) (3,059)
--------- --------- --------- ---------
Balance at December 31, 1994 2,761,261 20,171 (21,794) (1,623)
Exercise of stock options 77,679 17 -- 17
Issuance of common stock to employees 300,000 300 -- 300
Net loss -- -- (1,232) (1,232)
--------- --------- --------- ---------
Balance at December 31, 1995 3,138,940 20,488 (23,026) (2,538)
Conversion of mandatorily redeemable convertible
preferred stock to common stock 2,367,424 -- 4,429 4,429
Issuance of common stock in initial public
offering, net of issuance costs of $2,216 2,136,842 14,879 -- 14,879
Exercise of stock options and warrants 976,001 343 -- 343
Issuance of common stock to shareholders of 100,000 750 -- 750
Versant Europe
Net income -- -- 1,411 1,411
--------- --------- --------- ---------
Balance at December 31, 1996 8,719,207 $ 40,889 $ (21,615) $ 19,274
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 32
VERSANT OBJECT TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,411 $ (1,232) $ (3,059)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 387 286 405
Deferred rent (21) -- 17
Changes in current assets and liabilities:
Accounts receivable (761) (1,461) (1,922)
Prepaid expenses and other current assets 437 (437) (24)
Accounts payable and accrued liabilities 403 303 1,171
Increase in income tax payable 115 -- --
Increase in deferred revenue 947 369 246
-------- -------- --------
Net cash provided by (used in) operating activities 2,918 (2,172) (3,166)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (18,716) -- (1,692)
Proceeds from maturities of short-term investments 4,000 1,692 --
Purchases of property and equipment (72) (250) (316)
Deposits (29) 65 3
-------- -------- --------
Net cash provided by (used in) investing activities (14,817) 1,507 (2,005)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 15,972 317 18
Payment of equipment notes payable -- -- (185)
Principal payments under capital lease obligations (87) (18) (135)
Proceeds from issuance of preferred stock -- -- 4,429
-------- -------- --------
Net cash provided by financing activities 15,885 299 4,127
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,986 (366) (1,044)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,281 1,647 2,691
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,267 $ 1,281 $ 1,647
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 52 $ 5 $ 17
Foreign withholding taxes $ 14 $ 73 $ 56
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Capital lease obligations incurred for acquisition of equipment $ 625 $ 104 $ --
Conversion of preferred stock to common stock $ 4,429 $ -- $ 18,669
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 33
VERSANT OBJECT TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND OPERATIONS
Versant Object Technology Corporation (the "Company") was incorporated in
California in August 1988. 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, product
concentration and other factors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents and Short-term Investments
For purposes of the statements of cash flows, the Company considers all highly
liquid cash investments with an original maturity of three months or less to be
cash equivalents. Cash equivalents consist of United States Government
obligations. Investments have been accounted for in accordance with Statement of
Financial Accounting Standards No. 115 (SFAS 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 on its balance sheet. As
of December 31, 1996, the Company's investments consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Maturity of Securities
-------------------------------------
Amortized
Cost Basis Within One Year One to Five Years
---------- --------------- -----------------
<S> <C> <C> <C>
United States Treasury Bills $14,716 $14,716 $ --
</TABLE>
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.
Cost of license revenue consists principally of product royalties, royalty
obligations, product packaging, freight, users manuals, product media,
production labor costs and reserves for estimated bad debts.
Cost of services revenue consists principally of personnel costs associated with
providing training, consulting, technical support and nonrecurring engineering
work paid for by customers.
F-7
<PAGE> 34
The Company acted as sublicensor under an agreement, that expired on December
31, 1996 and was not renewed, on behalf of a certain developer of software tools
products that are used in the development of applications on the Company's
object-oriented database product. The Company also subcontracts a portion of its
consulting work to this developer. The Company incurred product royalty
obligations totaling approximately $33,000, $627,000 and $558,000 under the
terms of the sublicense agreement in 1996, 1995 and 1994, respectively.
Property and Equipment
Property and equipment, at cost, consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Computer equipment $ 2,864 $ 2,339
Furniture and fixtures 451 406
Software 521 403
Other 163 154
------- -------
3,999 3,302
Less -- Accumulated depreciation and amortization (3,324) (2,937)
------- -------
$ 675 $ 365
======= =======
</TABLE>
Depreciation and Amortization
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets of two to three years. Leased assets are
amortized over the shorter of the estimated useful life or the lease term.
Software Development Costs
Under the criteria set forth in Statement of Financial Accounting Standards No.
86 (SFAS 86), "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed," capitalization of software development costs begins upon
the establishment of technological feasibility. The Company has defined the
establishment of technological feasibility as the completion of a working model.
Amounts capitalized to date under the provisions of SFAS 86 have not been
material.
Deferred Revenue
Deferred revenue represents amounts received from customers under certain
license, maintenance and nonrecurring engineering agreements for which the
revenue earnings process has not been completed.
Deferred revenue was as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
Maintenance $1,878 $1,364
Development work 706 400
Training and consulting 227 100
------ ------
$2,811 $1,864
====== ======
</TABLE>
F-8
<PAGE> 35
Accrued Liabilities
Accrued liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Payroll and related $1,709 $ 727
Royalties and subcontracting fees 120 990
Other 545 518
------ ------
$2,374 $2,235
====== ======
</TABLE>
Major Customers
The Company had sales to major customers as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Customer A $5,117 $1,248 *
Customer B $2,067 $1,575 *
Customer C $1,868 * *
Customer D * $2,321 $1,208
</TABLE>
- -------------------------
* less than 10%
Export Sales
Export sales, consisting of sales to customers in foreign countries, were $4.2
million, $3.5 million and $3.7 million of total revenue in 1996, 1995 and 1994,
respectively.
Export sales by country or region were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Europe $1,871 * *
Canada 702 2,583 1,569
Australia 1,237 232 527
Japan 101 166 331
Other 303 544 1,282
------ ------ ------
$4,214 $3,525 $3,709
====== ====== ======
</TABLE>
- -------------------------
* not material
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of
credit risk principally consist of accounts receivable and short-term
investments. Credit is extended based on an evaluation of the customer's
financial condition, and generally, collateral is not required. As of December
31, 1996, approximately 39% of accounts receivable were concentrated with four
customers. The Company generally does not require collateral on accounts
receivable as the majority of the Company's customers are large, well
established companies. The Company provides reserves for credit losses and such
losses have been insignificant to date.
F-9
<PAGE> 36
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Net Income Per Share and Pro Forma Net Loss Per Share
For periods after the Company's initial public offering in July 1996, net income
per share has been computed using the weighted average number of common and
common equivalent shares (using the treasury stock method for outstanding
options). For the year ended December 31, 1995 and for the portion of 1996
preceding the initial public offering, net income (loss) per share was computed
on a pro forma basis. Pro forma net loss per share is computed using the pro
forma weighted average number of common equivalent shares outstanding during the
period. Common equivalent shares consist of mandatorily redeemable convertible
preferred stock (using the if converted method) and stock options and warrants
(using the treasury stock method). Common stock options and warrants are
excluded from the computation if their effect is antidilutive except that,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins
and staff policy, such computations include all common and common equivalent
shares issued within the 12 months preceding the filing date of the registration
statement for the initial public offering as if they were outstanding for all
periods presented (using the treasury stock method and the initial public
offering price of $8.00 per share). Mandatorily redeemable convertible preferred
stock outstanding during the period is included (using the if converted method)
in the computation as common equivalent shares even though the effect is
antidilutive. A historical net loss per share amount has not been presented for
1994 since such amount is not deemed meaningful due to the significant change in
the Company's capital structure that occurred in connection with the initial
public offering.
Reclassifications
Certain reclassifications have been made to amounts in prior years to conform to
the 1996 presentation.
3. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS
The Company leases its corporate headquarters facility under a four-year
operating lease agreement which expires in August 1997. The terms of the lease
provide for certain increases in rental payments during the lease term. Rental
expense under this agreement is recognized on a straight-line basis. The Company
also leases field office space generally under one-year operating lease
agreements. Rent expense for 1996, 1995 and 1994 was approximately $427,000,
$357,000 and $311,000, respectively. The future annual minimum lease payments at
December 31, 1996 under noncancellable operating leases were as follows (in
thousands):
<TABLE>
<S> <C>
1997 $216
1998 64
----
$280
====
</TABLE>
The Company has entered into capital lease agreements for equipment with an
original cost of $625,000 at December 31, 1996. The future minimum lease
payments required under these capital leases at December 31, 1996 were as
follows (in thousands):
<TABLE>
<S> <C>
1997 $ 281
1998 274
1999 168
2000 6
-----
Minimum lease payments 729
Less amount representing interest 90
-----
Present value of net minimum lease payments 639
Current maturities (226)
-----
Long term maturities $ 413
=====
</TABLE>
F-10
<PAGE> 37
4. LINE OF CREDIT
In June 1996, the Company entered into a $2,500,000 credit agreement (limited to
80% of eligible accounts receivable). Borrowings under the line bear interest at
the bank's prime rate plus 1/2%. This line is available to issue stand-by or
commercial letters of credit, and to enter into foreign exchange contracts and
settlements.
The agreement contains certain financial covenants that, among others things,
require the Company to maintain (a) a minimum quick ratio on a quarterly basis
of 1.75 to 1.0, (b) a minimum tangible net worth of $6.05 million, (c) a maximum
debt to tangible net worth ratio of 1.0 over the term of the agreement and (d)
certain monthly and quarterly profitability thresholds as defined in the
agreement. There were no borrowings under this agreement as of December 31,
1996. The agreement expires in May 1997. The Company was in compliance with the
above covenants at December 31, 1996.
5. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Prior to 1994, the Company had issued preferred stock to private investors in a
series of transactions resulting in shares of Series A, B, C and D preferred
stock being outstanding at the end of 1993. During 1994, in connection with a
new round of financing, all then outstanding preferred shares were converted to
Common Stock, a 1-for-9 reverse stock split was effected and a new class of
Series A and B redeemable preferred stock was issued at $1.9008 per share ("New
Series A" and "New Series B", respectively). In addition, shares of Series A-1
and B-1 preferred stock were authorized for future issuance to investors.
In conjunction with the Company's initial public offering of Common Stock, all
outstanding shares of Mandatorily Redeemable Convertible Preferred Stock were
converted into Common Stock. The effects of this conversion have been reflected
in the accompanying balance sheet at December 31, 1996.
A summary of outstanding Mandatorily Redeemable Convertible Preferred Stock, net
of issuance costs, is as follows (in thousands, except share data):
<TABLE>
<CAPTION>
December 31, 1995
-----------------------
Shares Amount
------ ------
<S> <C> <C>
New Series A 1,707,682 $ 3,195
New Series B 659,742 1,234
--------- -------
2,367,424 $ 4,429
========= =======
</TABLE>
6. COMMON STOCK
In July and August of 1996, the Company completed its initial public offering of
2,380,500 shares of Common Stock (including an over-allotment option of 310,500
shares) at $8.00 per share, resulting in net proceeds to the Company of $14.9
million after offering costs. In May 1996, the Company sold 100,000 shares of
Common Stock to the owners of Versant Europe at a price of $7.50 per share for
total proceeds to the Company of $750,000. The Company filed Amended and
Restated Articles of Incorporation dated April 27, 1994, which among other
items, effected a 1-for-9 reverse stock split for all shares outstanding. All
share and per share amounts in these financial statements reflect the post-split
values. Also in April 1994, the Company effected a one-for-one conversion of
Series A, B, C and D preferred stock into Common Stock and sold shares in a new
class of Series A and B Preferred Stock. The Company has, in connection with the
initial public offering of the Company's Common Stock, converted all the
outstanding shares of Mandatorily Redeemable Convertible Preferred Stock into
Common Stock.
During 1995, the Company sold shares of Common Stock to employees at $1.00 per
share, which represented fair market value on April 22, 1995. These share
issuances were made as pursuant to the 1989 Stock Option Plan and such amounts
are included in the option grant and option exercise table below.
F-11
<PAGE> 38
7. STOCK OPTIONS AND PURCHASE PLANS
1996 Equity Incentive Plan
In May 1996, the Board adopted the 1996 Equity Incentive Plan (the "1996 Equity
Plan") and the Company's shareholders approved the 1996 Equity Plan in June
1996. The 1996 Equity Plan 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 remain outstanding in accordance with their terms, but no further
options have been granted under the 1989 Option Plan since the initial public
offering. 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. As of December 31,
1996, the Company has authorized 850,000 shares of Common Stock for issuance
under the 1996 Equity Plan. At December 31, 1996, no options were exercisable.
1996 Directors Stock Option Plan
In May 1996, the Board adopted the 1996 Directors Stock Option Plan (the
"Directors Plan") and the Company's shareholders approved the Directors Plan in
June 1996. The Directors Plan provides for the grant of nonqualified stock
options to nonemployee directors of the Company, including automatic grants of
options to purchase 10,000 shares of Common Stock to nonemployee directors that
were granted concurrently with the initial public offering, an option to new
nonemployee directors to purchase 10,000 shares of Common Stock on the date on
which the new director joins the Board and an additional option to purchase
5,000 shares of Common Stock to each eligible director on each anniversary date
of such director's initial option grant under the Directors Plan if such
director has served continuously as a member of the Board since the date such
director was first granted an option under the Directors Plan. The exercise
price of all options granted under the Directors Plan will be the fair market
value of the Common Stock on the date of grant. All options issued under the
Directors Plan will vest as to 50% of the shares on each of the first two
anniversaries following the date of grant, provided the optionee continues as a
member of the Board or as a consultant to the Company. As of December 31, 1996,
the Company has authorized 75,000 shares of Common Stock for issuance under the
Directors Plan. At December 31, 1996, options for an aggregate of 50,000 shares
were granted and no options were exercisable.
1989 Stock Option Plan
As of December 31, 1996, the Company has authorized 2,013,826 shares of Common
Stock for issuance under the 1989 Stock Option Plan (the "Plan"). This plan was
succeeded by the 1996 Equity Plan during 1996. Under the provisions of the Plan,
the Board of Directors granted either incentive or non-statutory stock options
to employees, consultants, directors and officers to purchase Common Stock at an
exercise price of not less than 100% of the fair value (as determined by the
Board of Directors) of the shares on the date of grant, except that
non-statutory options were granted at 85% of such fair value. Options expire no
later than ten years from the date of grant and generally vest over a period of
5 years.
During 1991, the Company granted a non-statutory stock option to a shareholder
to purchase up to 11,111 shares of the Company's Common Stock at a price of
$0.25 per share. The option was granted outside the Plan as consideration for
consulting services to be provided by the shareholder to the Company and for the
shareholder to serve on the Company's Advisory Board. This option vests 20% per
year over five years, as long as the shareholder is providing consulting
services to the Company.
During 1994, the Company canceled 534,065 options with exercise prices ranging
from $0.36 to $2.25 per share that had been granted in prior years and replaced
them with 534,065 options at $0.25 per share, the fair value of the stock on
April 27, 1994. This transaction was treated as a cancellation of the old
options and the grant of new options in accordance with the provisions of the
1989 Option Plan.
F-12
<PAGE> 39
Reserved for Future Issuance
As of December 31, 1996, the Company had reserved shares of Common Stock for the
following purposes:
<TABLE>
<S> <C>
Exercise of common stock warrants 21,053
Employee stock purchase plan 125,000
Exercise of stock options 1,395,677
---------
1,541,730
---------
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its Option Plan. Accordingly, no compensation cost has been recognized for
its Option Plan. Had compensation cost for the Company's Option Plan been
determined based on the fair value at the grant dates for the awards calculated
in accordance with the method prescribed by FASB Statement No. 123, the
Company's net income (loss) and net income (loss) per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C> <C>
Net income (loss) As Reported $ 1,411 $(1,232)
Pro forma $ 989 $(1,270)
Net income (loss) per share As Reported $ 0.18 $ (0.21)
Pro forma $ 0.13 $ (0.21)
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield 0%
Expected stock price volatility 90%
Risk-free interest rate 7.0%
Expected life of options 5.75 years
Forfeiture rate N/A
</TABLE>
F-13
<PAGE> 40
The weighted average fair value of options granted during 1996 and 1995 was
$7.31 and $0.95 per share, respectively. Option activity under all Option Plans
is as follows:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------
Weighted
Options Number of Average
Available Shares Exercise Price
--------- ------ --------------
<S> <C> <C> <C>
Balance at December 31, 1993 118,616 452,480 $0.29
Authorized 435,589 -- --
Granted (1,110,125) 1,110,125 0.25
Exercised -- (64,933) 0.26
Canceled 633,233 (633,233) 0.50
---------- ---------- -----
Balance at December 31, 1994 77,313 864,439 0.25
Authorized 800,000 -- --
Granted (873,361) 873,361 0.95
Exercised -- (377,679) 0.35
Canceled 198,977 (198,977) 0.25
---------- ---------- -----
Balance at December 31, 1995 202,929 1,161,144 0.59
Authorized 1,075,000 -- --
Granted (608,365) 605,365 7.31
Exercised -- (929,506) 0.59
Canceled 74,476 (74,476) 4.92
---------- ---------- -----
Balance at December 31, 1996 744,040 762,527 $5.48
========== ========== =====
</TABLE>
As of December 31, 1996, 55,362 of the outstanding options were exercisable.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ---------------------------------
Number Weighted Weighted Number
Outstanding Average Average Exercisable at Weighted
at December 31, Remaining Exercise December 31, Average
Exercise Prices 1996 Contractual Life Price 1996 Exercise Price
--------------- --------------- ---------------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.250 85,792 7.48 $ 0.250 22,316 $0.250
1.000 150,621 8.52 1.000 27,462 1.000
1.500 115,300 9.05 1.500 5,583 1.500
7.500 69,650 9.32 7.500 --
8.000 225,000 9.55 8.000 --
8.125 66,800 9.56 8.125 --
18.750 52,365 9.81 18.750 --
------- ------
765,528 55,362
======= ======
</TABLE>
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 the last day of each offering period. As
of December 31, 1996, no shares had been issued.
F-14
<PAGE> 41
8. INCOME TAXES
The Company accounts for income taxes pursuant to the provisions of SFAS No.
109, "Accounting for Income Taxes," which requires an asset and liability
approach to accounting for income taxes. The Company incurred net operating
losses in 1995 and 1994 and consequently paid no federal or state taxes based on
income. The Company did pay foreign withholding taxes during that period. The
provision for income taxes consisted of the following components (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 75 $-- $--
State 40 -- --
Foreign withholding 14 73 56
---- ---- ----
Total current 129 73 56
Deferred:
Federal -- -- --
State -- -- --
---- ---- ----
Total deferred -- -- --
Total provision for income taxes $129 $ 73 $ 56
==== ==== ====
</TABLE>
The provision for income taxes differs from the amount estimated by applying the
statutory federal income tax rate to income (loss) before income taxes as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Provision (benefit) computed at federal statutory rate $ 534 $(431) $ --
State income taxes, net of federal benefit 92 -- --
Change in valuation allowance (750) 376 --
Other 243 128 56
----- ----- -----
Provisions for income taxes $ 129 $ 73 $ 56
----- ----- -----
Effective tax rate 7.5% -- --
</TABLE>
The components of the net deferred tax asset were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards $ 6,438 $ 7,573
Tax credit carryforwards 1,064 840
Other 700 539
------- -------
8,202 8,952
Valuation allowance (8,202) (8,952)
------- -------
Net deferred tax asset $ -- $ --
======= =======
</TABLE>
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of $17.0 million and $5.4 million, respectively, and tax credit
carryforwards of $1.1 million, which all expire through 2010. Due to its history
of operating losses through 1995 and other factors, the Company believes that
there is sufficient uncertainty regarding the realizability of net operating
loss and tax credit carryforwards, and therefore a valuation allowance of
approximately $8.2 million has been recorded against the Company's net deferred
tax assets of approximately $8.2 million.
F-15
<PAGE> 42
Due to the "change in ownership" provisions of the Internal Revenue Code of
1986, the availability of net operating loss and tax credit carryforwards to
offset federal taxable income in future periods is subject to an annual
limitation due to changes in ownership for income tax purposes. Usage of net
operating loss carryforwards is limited to approximately $4.0 million per year
because of past ownership changes.
9. RELATED PARTIES
The Company has an agreement with a shareholder, under which a) the Company
licenses for resale certain of the shareholder's products and remits a royalty
to the shareholder and b) the shareholder performed certain porting of the
Company's products in exchange for a royalty payment related to ongoing sales of
these products. Royalties due under these agreements were $41,000 and $50,000 at
December 31, 1996 and 1995, respectively. In 1992, the Company also entered into
a distribution agreement with this shareholder, under which revenue to date has
not been material.
10. DISTRIBUTOR ARRANGEMENT
During 1995, the Company entered into an arrangement with a group of European
investors pursuant to which the investors organized and funded an independent
German company ("Versant Europe"), which became the exclusive distributor of the
Company's product in Europe, including direct distribution in Germany and
responsibility for managing certain existing distributors of the Company's
product in other parts of Europe. There is no fixed term to the distributor
agreement; however, either party can cancel the arrangement under certain
circumstances. In the event that the Company is sold, shareholders of the
distributor have the right to require the Company to purchase their interest in
the distributor at a price determined using a formula that the parties have
agreed upon as the means to calculate the fair market value of the distributor.
Also, the Company has the right to acquire the distributor any time after March
1996 using the same formula as above and has a right of first refusal on the
sale of the distributorship to another party at a price equal to the offer made
by the other party. (See Note 11).
Revenue from sales to this distributor during the year ended December 31, 1996
was $1,868,000. Sales to this distributor in 1995 were immaterial.
11. SUBSEQUENT EVENTS
On March 19, 1997, the Company exercised its right to acquire Versant Europe
using the agreed upon price formula, as adjusted. Upon closing, the Company
expects to pay approximately $2.0 million in cash and $1.6 million in Common
Stock for 100% of the outstanding equity of Versant Europe. The Company expects
the transaction to close on or before March 31, 1997. The Company will record
this transaction under the purchase method of accounting.
On February 2, 1997, the Company entered into a ten-year corporate facility
lease agreement. The lease begins on June 1, 1997 and expires on May 31, 2007.
The total annual minimum lease payments under this agreement will be as follows
(in thousands):
<TABLE>
<S> <C>
1997 $ 658
1998 1,128
1999 1,128
2000 1,128
2001 1,128
Beyond 2001 6,110
--------
$ 11,280
========
</TABLE>
F-16
<PAGE> 43
VERSANT OBJECT TECHNOLOGY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance at Additions
Beginning Charged to Balance at
of Year Income Deductions End of Year
---------- ---------- ---------- -----------
(in thousands)
Allowance for doubtful accounts and
customer returns:
<S> <C> <C> <C> <C>
Year ended December 31, 1994 $ 44 32 3 $ 73
Year ended December 31, 1995 $ 73 63 55 $ 81
Year ended December 31, 1996 $ 81 621 99 $ 603
</TABLE>
F-17
<PAGE> 44
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
3.01 -- Registrant's Amended and Restated Articles of Incorporation, as
amended(1)
3.02 -- Registrant's Certificate of Amendment of Articles of Incorporation
filed prior to the closing of registrant's initial public
offering(1)
3.03 -- Registrant's Amended and Restated Articles of Incorporation filed
following the closing of registrant's initial public offering(1)
3.04 -- Registrant's Bylaws(1)
3.05 -- Registrant's Amended and Restated Bylaws adopted prior to the
closing of registrant's initial public offering(1)
4.01 -- [intentionally omitted]
4.02 -- Preferred Stock Purchase Agreement, dated as of April 27, 1994, as
amended(1)
10.01 -- Registrant's 1989 Stock Option Plan, as amended, and related
documents(1)**
10.02 -- Registrant's 1996 Equity Incentive Plan and related documents(1)**
10.03 -- Registrant's 1996 Directors Stock Option Plan and related
documents(1)**
10.04 -- Registrant's 1996 Employee Stock Purchase Plan and related
documents(1)**
10.05 -- Registrant's 401(k) Plan and addendum thereto(1)
10.06 -- Lease Agreement dated March 22, 1993 between Lincoln Property
Company N.C., Inc. and Registrant, as amended(1)
10.07 -- Master Lease Agreement dated January 26, 1996 between LINC Capital
Management, a division of Scientific Leasing Inc., and
Registrant(1)
10.08 -- Amended and Restated Loan and Security Agreement dated as of June
14, 1996 between Registrant and Silicon Valley Bank(1)
10.09 -- Joint Venture Agreement dated as of July 26, 1995 between
Registrant and ISAR-Vermogensverwaltung Gbr mbH(1)*
10.10 -- Form of Indemnity Agreement entered into by Registrant with each
of its directors and executive officers(1)
10.11 -- Versant 1996 Executive Compensation Plan -- Rich Kadet(1)*/**
10.12 -- Versant 1996 Executive Compensation Plan -- George Franzen(1)*/**
10.13 -- Versant 1996 Executive Compensation Plan -- Jim Lochry(1)*/**
10.14 -- Form of Amendment to Versant Object Technology Corporation Stock
Option Agreement(1)**
10.15 -- Lease Agreement dated November 25, 1996 between John Arrillaga,
Trustee et. al. and Versant Object Technology Corporation(2)
11.01 -- Statement regarding computation of per share earnings(2)
23.01 -- Consent of Arthur Andersen LLP, Independent Public Accountants(2)
27.01 -- Financial Data Schedule(2)
(1) Incorporated by reference to the registrant's Registration Statement on
Form SB-2 (file number 333-4910-LA) filed with and declared effective by
the Securities and Exchange Commission on July 17, 1996.
(2) Filed herewith.
* Confidential treatment has been requested with respect to certain portions
of this agreement. Such portions have been omitted from the filing and have
been filed separately with the Securities and Exchange Commission.
** Management contract or compensatory plan.
X-1
<PAGE> 1
Exhibit 10.15
LEASE AGREEMENT
THIS LEASE, made this 25th day of November, 1996 between JOHN
ARRILLAGA, Trustee, or his Successor Trustee, UTA dated 7/20/77 (ARRILLAGA
FAMILY TRUST) as amended, and RICHARD T. PEERY, Trustee, or his Successor
Trustee, UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as
amended, hereinafter called Landlord, and VERSANT OBJECT TECHNOLOGY CORPORATION,
a California corporation, hereinafter called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit "A",
attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
All of that certain 54,492+ square foot, one-story building to be
constructed by Landlord and to be located at 6539 Dumbarton Circle, Fremont,
California 94555 ("Building"). Said Premises and exclusive parking appurtenant
thereto are more particularly shown within the area outlined in Red on Exhibit A
attached hereto. The entire parcel, of which the Premises is a part, is shown
within the area outlined in Green on Exhibit A attached hereto. The interior of
the Building leased hereunder shall be constructed by Landlord as set forth in
the related Construction Agreement of even date herewith. The improved interior
configuration is shown in Red on Exhibit B to be attached hereto.
The word "Premises" as used throughout this lease is hereby defined to
include the nonexclusive use of landscaped areas, sidewalks and driveways in
front of or adjacent the Premises, and the nonexclusive use of the area directly
underneath or over such sidewalks and driveways. The gross leasable area of the
Building shall be measured from outside of exterior walls to outside of exterior
walls, and shall include any atriums, covered entrances or egresses and covered
loading areas.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of
general office, light manufacturing, research and development, and storage
and other uses necessary for Tenant to conduct Tenant's business, provided
that such uses shall be in accordance with all applicable governmental
laws and ordinances, and for no other purpose. Tenant shall not do or
permit to be done in or about the Premises nor bring or keep or permit to
be brought or kept in or
1
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Initials:_______
<PAGE> 2
about the Premises anything which is prohibited by or will in any way
increase the existing rate of (or otherwise affect) fire or any
insurance covering the Premises or any part thereof, or any of its
contents, or will cause a cancellation of any insurance covering the
Premises or any part thereof, or any of its contents. Tenant shall not
do or permit to be done anything in, on or about the Premises which
will in any way obstruct or interfere with the rights of other tenants
or occupants of the Premises or neighboring premises or injure or annoy
them, or use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause,
maintain or permit any nuisance in, on or about the Premises. No sale
by auction shall be permitted on the Premises. Tenant shall not place
any loads upon the floors, walls, or ceiling which endanger the
structure, or place any harmful fluids or other materials in the
drainage system of the building, or overload existing electrical or
other mechanical systems. No waste materials or refuse shall be dumped
upon or permitted to remain upon any part of the Premises or outside of
the building in which the Premises are a part, except in trash
containers placed inside exterior enclosures designated by Landlord for
that purpose or inside of the building proper where designated by
Landlord. No materials, supplies, equipment, finished products or
semifinished products, raw materials or articles of any nature shall be
stored upon or permitted to remain outside the Premises. Tenant shall
not place anything or allow anything to be placed near the glass of any
window, door partition or wall, which may appear unsightly from outside
the Premises. No loudspeaker or other device, system or apparatus which
can be heard outside the Premises shall be used in or at the Premises
without the prior written consent of Landlord. Tenant shall not commit
or suffer to be committed any waste in or upon the Premises. Tenant
shall indemnify, defend and hold Landlord harmless against any loss,
expense, damage, reasonable attorneys' fees, or liability arising out
of failure of Tenant to comply with any applicable law, governing
Tenant's use of the Premises. Tenant shall comply with any covenant,
condition, or restriction ("CC&R's") affecting the Premises. The
provisions of this paragraph are for the benefit of Landlord only and
shall not be construed to be for the benefit of any tenant or occupant
of the Premises.
2. TERM(1)
A. The term of this Lease shall be for a period of TEN (10) years
(unless sooner terminated as hereinafter provided) and,
subject to Paragraphs 2B and 3, shall commence on the 1st day
of June 1997 and end on the 31st day of May 2007.
B. Possession of the Premises shall be deemed tendered and the
term of the Lease shall commence when the first of the
following occurs:
(a) One day after Certificate of Occupancy is granted by
the proper governmental agency, or, if the
governmental agency having jurisdiction over the area
in which
- --------
(1)It is agreed in the event said Lease commences on a date other than the first
day of the month the term of the Lease will be extended to account for the
number of days in the partial month. The Basic Rent during the resulting partial
month will be pro-rated (for the number of days in the partial month) at the
Basic Rent rate scheduled for the projected commencement date as shown in
Paragraph 39.
2
Initials:_______
Initials:_______
<PAGE> 3
the Premises are situated does not issue certificates
of occupancy, then the same number of days after
certification by Landlord's architect or contractor
that Landlord's construction work has been completed;
or
(b) Upon the occupancy of the Premises by any of Tenant's
or operating personnel; or
(c) When the Tenant Improvements have been substantially
completed for Tenant's use and occupancy, in
accordance and compliance with Exhibit B of this
Lease Agreement and the related Construction
Agreement; or
(d) As otherwise agreed in writing.
3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver
possession of said premises to Tenant at the commencement of the said
term, as hereinbefore specified, this Lease shall not be void or
voidable; no obligation of Tenant shall be affected thereby; nor shall
Landlord or Landlord's agents be liable to Tenant for any loss or
damage resulting therefrom; but in that event the commencement and
termination dates of the Lease, and all other dates affected thereby
shall be revised to conform to the date of Landlord's delivery of
possession, as specified in Paragraph 2B, above. The above is, however,
subject to the provision that the period of delay of delivery of the
Premises shall not exceed 140 days from the commencement date herein
(except those delays caused by Acts of God, strikes, war, utilities,
governmental bodies, weather, unavailable materials, and delays beyond
Landlord's control shall be excluded in calculating such period) in
which instance Tenant, at its option, may by written notice to
Landlord, terminate this Lease.
4. RENT
A. Basic Rent. Tenant agrees to pay to Landlord at such place as
Landlord may designate without deduction, offset, prior
notice, or demand, and Landlord agrees to accept as Basic Rent
for the leased Premises the total sum of ELEVEN MILLION TWO
HUNDRED SEVENTY NINE THOUSAND EIGHT HUNDRED FORTY FOUR AND
NO/100 Dollars ($11,279.844.00) in lawful money of the United
States of America, payable as follows:
See Paragraph 39 for Basic Rent Schedule
B. Time for Payment. Full monthly rent is due in advance on the
first day of each calendar month. In the event that the term
of this Lease commences on a date other than the first day of
the calendar month, on the date of commencement of the term
hereof Tenant shall pay to Landlord as rent for the period
from such date of commencement to the first day of the next
succeeding calendar month that proportion of the monthly rent
hereunder which the number of days between such date of
commencement and the first day of the next succeeding calendar
month bears to thirty (30). In the event that the term of this
Lease for any reason ends on a date other than the last day of
a calendar month, on the first day of the last calendar month
of the term hereof Tenant shall pay to Landlord as rent for
the period from said first day of said last calendar month to
and including the last day of the term hereof that proportion
of the monthly rent hereunder which the number of days between
said first day of said last calendar month and the last day of
the term hereof bears to thirty (30).
3
Initials:_______
Initials:_______
<PAGE> 4
C. Late Charge. Notwithstanding any other provision of this
Lease, if Tenant is in default in the payment of rental as set
forth in this Paragraph 4 when due, or any part thereof,
Tenant agrees to pay Landlord, in addition to the delinquent
rental due, a late charge for each rental payment in default
ten (10) days. Said late charge shall equal ten percent (10%)
of each rental payment so in default.
D. Additional Rent. Beginning with the commencement date of the
term of this Lease, Tenant shall pay to Landlord or to
Landlord's designated agent in addition to the Basic Rent and
as Additional Rent the following:
(a) All Taxes relating to the Premises as set forth in
Paragraph 9, and
(b) All insurance premiums relating to the Premises, as
set forth in Paragraph 12, and
(c) All charges, costs and expenses, which Tenant is
required to pay hereunder, together with all interest
and penalties, costs and expenses including
reasonable attorneys' fees and legal expenses, that
may accrue thereto in the event of Tenant's failure
to pay such amounts, and all damages, reasonable
costs and expenses which Landlord may incur by reason
of default of Tenant or failure on Tenant's part to
comply with the terms of this Lease. In the event of
nonpayment by Tenant of Additional Rent, Landlord
shall have all the rights and remedies with respect
thereto as Landlord has for nonpayment of rent, and
(d) all prorated costs and expenses related to the
Ardenwood Property Owners' Associations as set forth
in Paragraph 49.
The additional Rent due hereunder shall be paid to
Landlord or Landlord's agent (i) within five days for taxes
and insurance and within thirty days for all other Additional
Rent items after presentation of invoice from Landlord or
Landlord's agent setting forth such Additional Rent and/or
(ii) at the option of Landlord, Tenant shall pay to Landlord
monthly, in advance, Tenant's prorated share of an amount
estimated by Landlord to be Landlord's approximate average
monthly expenditure for such Additional Rent items, which
estimated amount shall be reconciled within 120 days of the
end of each calendar year or more frequently if Landlord
elects to do so at Landlord's sole and absolute discretion, as
compared to Landlord's actual expenditure for said Additional
Rent items, with Tenant paying to Landlord, upon demand, any
amount of actual expenses expended by Landlord in excess of
said estimated amount, or Landlord refunding to Tenant
(providing Tenant is not in default in the performance of any
of the terms, covenants and conditions of this Lease) any
amount of estimated payments made by Tenant in excess of
Landlord's actual expenditures for said Additional Rent items.
Upon request, by Tenant, Landlord shall provide reasonable
detail supporting such invoices.
The respective obligations of Landlord and Tenant
under this paragraph shall survive the expiration or other
termination of the term of this Lease, and if the term hereof
shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent
incurred for the calendar year in which the term
4
Initials:_______
Initials:_______
<PAGE> 5
hereof expires or otherwise terminates shall be determined and
settled on the basis of the statement of actual Additional
Rent for such calendar year and shall be prorated in the
proportion which the number of days in such calendar year
preceding such expiration or termination bears to 365.
E. Fixed Management Fee. Beginning with the Commencement Date
of the Term of this Lease, Tenant shall pay to Landlord, in
addition to the Basic Rent and Additional Rent, a fixed
monthly management fee ("Management Fee") equal to 2% of the
Basic Rent due for each month during the Lease Term.
F. Place of Payment of Rent and Additional Rent. All Basic
Rent hereunder and all payments hereunder for Additional Rent
shall be paid to Landlord at the office of Landlord at
Peery/Arrillaga, File 1504, box 60000, San Francisco, CA
94160, or to such other person or to such other place as
Landlord may from time of time designate in writing.
* G. Security Deposit. Currently with Tenant's execution of
this Lease, Tenant shall deposit with Landlord the sum of TWO
HUNDRED TWELVE THOUSAND FIVE HUNDRED EIGHTEEN AND 80/100
Dollars ($212,518.80). Said sum shall be held by Landlord as a
Security Deposit for the faithful performance by Tenant of all
of the terms, covenants, and conditions of this Lease to be
kept and performed by Tenant during the term hereof. If Tenant
defaults with respect to any provision of this Lease,
including, but not limited to, the provisions relating to the
payment of rent and any of the monetary sums due herewith,
after passage of the applicable notice an cure period,
Landlord may (but shall not be required to) use, apply or
retain all or any part of this Security Deposit for the
payment of any other amount which Landlord may spend by reason
of Tenant's default or to compensate Landlord for any other
loss or damage which Landlord may suffer by reason of Tenant's
default. If any portion of said Deposit is so used or applied,
Tenant shall, within ten (10) days after written demand
therefor, deposit cash with Landlord in the amount sufficient
to restore the Security Deposit to its original amount.
Tenant's failure to do so shall be a material breach of this
Lease. Landlord shall not be required to keep this Security
Deposit separate from its general funds, and Tenant shall not
be entitled to interest on such Deposit. If Tenant fully and
faithfully performs every provision of this Lease to be
performed by it, the Security Deposit or any balance thereof
shall be returned to Tenant (or at Landlord's option, to the
last assignee of Tenant's interest hereunder) at the
expiration of the Lease term and after Tenant has vacated the
Premises. In the event of termination of Landlord's interest
in this Lease, Landlord shall transfer said Deposit to
Landlord's successor in interest whereupon Tenant agrees to
release Landlord from liability for the return of such Deposit
or the accounting therefor.
5. ACCEPTANCE AND SURRENDER OF PREMISES BY entry hereunder, Tenant accepts the
Premises as being in good and sanitary order, condition and repair and accepts
the building and improvements included in the Premises in their present
condition and without
- ----------
*$106,259.40 Cash due upon Lease execution.
$106,259.40 Promissory Note due June 1, 1998.
5
Initials:_______
Initials:_______
<PAGE> 6
representation or warranty by Landlord as to the condition of such building or
as to the use or occupancy which may be made thereof. Any exceptions to the
foregoing must be by written agreement executed by Landlord and Tenant. Tenant
agrees on the last day of the Lease term, or on the sooner termination of this
Lease, to surrender the Premises promptly and peaceably to Landlord in good
condition and repair (damage by Acts of God, fire, normal wear and tear
excepted), with all interior walls painted, or cleaned so that they appear
freshly painted, and repaired and replaced, if damaged; all floors cleaned and
waxed; all carpets cleaned and shampooed; all broken, marred or nonconforming
acoustical ceiling tiles replaced; all windows washed; the air-conditioning and
heating systems serviced by a reputable and licensed service firm and in good
operating condition and repair; the plumbing and electrical systems and lighting
in good order and repair, including replacement of any burned out or broken
light bulbs or ballasts; together with all alterations, additions, and
improvements which may have been made in, to, or on the Premises (except
moveable trade fixtures installed at the expense of Tenant) except that, subject
to Paragraph 6 below, Tenant shall ascertain from Landlord within thirty (30)
days before the end of the term of this Lease whether Landlord desires to have
the Premises or any part or parts thereof restored to their condition and
configuration as when the Premises were delivered to Tenant and if Landlord
shall so desire, then Tenant shall restore said Premises or such part or parts
thereof before the end of this Lease at Tenant's sole cost and expense, (which
written consent will specify whether Landlord shall require removal of said
alterations and/or additions), Tenant, on or before the end of the term or
sooner termination of this Lease, shall remove all of Tenant's personal property
and trade fixtures from the Premises, and all property not so removed on or
before the end of the term or sooner termination of this Lease shall be deemed
abandoned by Tenant and title to same shall thereupon pass to Landlord without
compensation to Tenant. Landlord may, upon termination of this Lease, remove all
moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost,
and repair any damage caused by such removal at Tenant's sole cost. If the
Premises be not surrendered at the end of the term or sooner termination of this
Lease, Tenant shall indemnify Landlord against loss or liability resulting from
the delay by Tenant in so surrendering the Premises including, without
limitation, any claims made by any succeeding tenant founded on such delay.
Nothing contained herein shall be construed as an extension of the term hereof
or as consent of Landlord to any holding over by Tenant. The voluntary or other
surrender of this Lease or the Premises by Tenant or a mutual cancellation of
this Lease shall not work as a merger and, at the option of Landlord, shall
either terminate all or any existing subleases or subtenancies or operate as an
assignment to Landlord of all or any such subleases or subtenancies.
6. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord first had and obtained by Tenant, (which written consent
will specify whether Landlord shall require removal of said alterations and/or
additions), (such consent not to be unreasonably withheld), but at the cost of
Tenant, and any addition to, or alteration of, the Premises, except moveable
furniture and trade fixtures, shall at once become a part of the Premises and
belong to Landlord. Landlord reserves the right to approve all contractors and
mechanics proposed by Tenant to make such alterations and additions. Tenant
shall retain title to all moveable furniture and trade fixtures placed in the
Premises. All heating, lighting, electrical, air-conditioning, floor to ceiling
partitioning, drapery, carpeting, and floor installations made by Tenant,
together with
6
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all property that has become an integral part of the Premises, shall not be
deemed trade fixtures. Tenant agrees that it will not proceed to make such
alteration or additions, without having obtained consent from Landlord to do so,
and until five (5) days from the receipt of such consent, in order that Landlord
may post appropriate notices to avoid any liability to contractors or material
suppliers for payment for Tenant's improvements. Tenant will at all times permit
such notices to be posted and to remain posted until the completion of work.
Tenant shall, if required by Landlord, secure at Tenant's own cost and expense,
a completion and lien indemnity bond, satisfactory to Landlord, for such work.
Tenant further covenants and agrees that any mechanic's lien filed against the
Premises for work claimed to have been done for, or materials claimed to have
been furnished to Tenant, will be discharged by Tenant, by bond or otherwise,
within ten (10) days after the filing thereof, at the cost and expense of
Tenant. Any exceptions to the foregoing must be made in writing and executed by
both Landlord and Tenant.
7. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, or replacement, and in good and sanitary
condition. Tenant's maintenance and repair responsibilities herein referred to
include, but are not limited to, janitorization, all windows (interior and
exterior), window frames, plate glass and glazing (destroyed by accident or act
of third parties), truck doors, plumbing systems (such as water and drain lines,
sinks, toilets, faucets, drains, showers and water bulbs, tubes and fountains),
electrical systems (such as panels, conduits, outlets, lighting fixtures, lamps,
bulbs and ballasts), heating and air-conditioning systems (such as compressors
fans air handlers, ducts, mixing boxes, thermostats, time clocks, boilers,
heaters, supply and return grills), structural elements and exterior surfaces of
the building, store fronts, roofs, downspouts, all interior improvements within
the premises including but not limited to wall coverings, window coverings,
carpet, floor coverings, partitioning, ceilings, doors (both interior and
exterior), including closing mechanisms, latches, locks, skylights (if any),
automatic fire extinguishing systems, and elevators and all other interior
improvements of any nature whatsoever. Tenant agrees to provide carpet shields
under all rolling chairs or to otherwise be responsible for wear and tear of the
carpet caused by such rolling chairs if such wear and tear exceeds that caused
by normal foot traffic in surrounding areas. Areas of excessive wear shall be
replaced at Tenant's sole expense upon Lease termination. Tenant hereby waives
all rights under, and benefits of, Subsection 1 of Section 1932 and 1941 and
1942 of the California Civil Code and under any similar law, statute or
ordinance now or hereafter in effect. In the event any of the above maintenance
responsibilities apply to any other tenant(s) of Landlord where there is common
usage with other tenant(s), such maintenance responsibilities and charges shall
be allocated to the leased Premises by square footage or other equitable basis
as calculated and determined by Landlord.
8. UTILITIES Tenant shall pay promptly, as the same become due, all charges for
water, gas, electricity, telephone, telex and other electronic communication
service, sewer service, waste pick-up and any other utilities, materials or
services furnished directly to or used by Tenant on or about the Premises during
the term of this Lease, including, without limitation, any temporary or
permanent utility surcharge or other exactions whether or not hereinafter
imposed. In the event the above charges apply to any other tenant(s) or Landlord
where there is common usage with
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other tenant(s), such charges shall be allocated to the leased Premises by
square footage or other equitable basis as calculated and determined by
Landlord.
Landlord shall not be liable for and Tenant shall not be entitled to
any abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
9. TAXES
A. As Additional rent and in accordance with Paragraph 4D of this
Lease, Tenant shall pay to Landlord, or if Landlord so directs, directly to the
Tax Collector, all Real Property taxes relating to the Premises. In the event
the Premises leased hereunder consist of only a portion of the entire tax
parcel, Tenant shall pay to Landlord Tenant's proportionate share of such real
estate taxes allocated to the leased Premises by square footage or other
reasonable basis as calculated and determined by Landlord. If the tax billing
pertains 100% to the leased Premises, and Landlord chooses to have Tenant pay
said real estate taxes directly to the Tax Collector, then in such event it
shall be the responsibility of Tenant to obtain the tax and assessment bills and
pay, prior to delinquency, the applicable real property taxes and assessments
pertaining to the leased Premises, and failure to receive a bill for taxes
and/or assessments shall not provide a basis for cancellation of or
nonresponsibility for payment of penalties for nonpayment or late payment by
Tenant. The term "Real Property Taxes", as used herein, shall mean (i) all
taxes, assessments, levies and other charges of any kind or nature whatsoever,
general and special, foreseen and unforeseen (including all installments of
principal and interest required to pay any general or special assessments for
public improvements and any increases resulting from reassessments caused by any
change in ownership of the Premises) now or hereafter imposed by any
governmental or quasi-governmental authority or special district having the
direct or indirect power to tax or levy assessments, which are levied or
assessed against, or with respect to the value, occupancy or use of, all or any
portion of the Premises (as now constructed or as may at any time hereafter be
constructed, altered, or otherwise changed) or Landlord's interest therein; any
improvements located within the Premises (regardless of ownership); the
fixtures, equipment and other property of Landlord, real or personal, that are
an integral part of and located in the Premises; or parking areas, public
utilities, or energy within the Premises; (ii) all charges, levies or fees
imposed by reason of environmental regulation or other governmental control of
the Premises; and (iii) all costs and fees (including reasonable attorney's
fees) incurred by Landlord in reasonably contesting any Real Property Tax and in
negotiating with public authorities as to any Real Property Tax. If at any time
during the term of this Lease the taxation or assessment of the Premises
prevailing as of the commencement date of this Lease shall be altered so that in
lieu of or in addition to any Real Property Tax described above there shall be
levied, assessed or imposed (whether by reason of a change in the method of
taxation or assessment, creation of a new tax or charge, or any other cause) an
alternate or additional tax or charge (i) on the value, use or occupancy of the
Premises or Landlord's interest herein or (ii) on or measured by the gross
receipts, income or rentals from the Premises, on Landlord's business of leasing
the Premises, or computed in any manner with respect to the operation of the
Premises, then any such tax or charge, however designated, shall be included
within the meaning of the term "Real Property Taxes" for purposes of this Lease.
If any Real Property Tax is based upon property or rents
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unrelated to the Premises, then only that part of such Real Property Tax that is
fairly allocable to the Premises shall be included within the meaning of the
term "Real Property Taxes". Notwithstanding the foregoing, the term "Real
Property Taxes" shall not include estate, inheritance, gift or franchise taxes
of Landlord or the federal or state net income tax imposed on Landlord's income
from all sources. See Paragraph 49
B. Taxes on Tenant's Property Tenant shall be liable for and shall pay
ten days before delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises. If any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property or if the assessed value of the Premises is increased by the
inclusion therein of a value placed upon such personal property or trade
fixtures of Tenant and if Landlord, after written notice to Tenant, pays the
taxes based on such increased assessment, which Landlord shall have the right to
do regardless of the validity thereof, but only under proper protest if
requested by Tenant. Tenant shall upon demand, as the case may be, repay to
Landlord the taxes so levied against Landlord, or the proportion of such taxes
resulting from such increase in the assessment; provided that in any such event
Tenant shall have the right, in the name of Landlord and with Landlord's full
cooperation, to bring suit in any court of competent jurisdiction to recover the
amount of such taxes so paid under protest, and any amount so recovered shall
belong to Tenant.
10. LIABILITY INSURANCE Tenant, at Tenant's expense, agrees to keep in
force during the term of this Lease a policy of commercial general insurance
with combined single limit coverage of not less than Two Million Dollars
($2,000,000) for bodily injury and property damage occurring in, on or about the
Premises, including parking and landscaped areas. Such insurance shall be
primary and noncontributory as respects any insurance carried by Landlord. The
policy or policies effecting such insurance shall name Landlord as additional
insureds, and shall insure any liability of Landlord, contingent or otherwise,
as respects acts or omissions of Tenant, its agents, employees or invitees or
otherwise by any conduct or transactions of any of said persons in or about or
concerning the Premises, including any failure of Tenant to observe or perform
any of its obligations hereunder; shall be issued by an insurance company
admitted to transact business in the State of California; and shall provide that
the insurance effected thereby shall not be canceled, except upon thirty (30)
day's prior written notice to Landlord. A certificate of insurance of said
policy should be delivered to Landlord. If, during the term of this Lease, in
the considered reasonable opinion of Landlord's Lender, insurance advisor, or
counsel, the amount of insurance described in Paragraph 10 is not adequate,
Tenant agrees to increase said coverage to such reasonable amount as Landlord's
Lender, insurance advisor, or counsel shall deem adequate.
11. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION
INSURANCE Tenant shall maintain a policy or policies of fire and property damage
insurance in "all risk" form with a sprinkler leakage endorsement insuring the
personal property, inventory, trade fixtures, and leasehold improvements within
the leased Premises for the full replacement value thereof. The proceeds from
any of such policies shall be used for the repair or replacement of such items
so insured.
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Tenant shall also maintain a policy or policies of workman's compensation
insurance an and any other employee benefit insurance sufficient to comply with
all laws.
12. PROPERTY INSURANCE Landlord shall purchase an keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (allocated to the leased Premises by square footage or other
equitable basis as calculated and determined by Landlord) of the deductibles on
insurance claim and the cost of, policy or policies of insurance covering loss
or damage to the Premises (excluding routine maintenance and repairs and
incidental damage or destruction caused by accidents or vandalism for which
Tenant is responsible under Paragraph 7) in the amount of the full replacement
value thereof, providing protection against those perils included within the
classification of "all risks" insurance and flood and/or earthquake insurance,
if available, plus a liability policy and a policy of rental income insurance in
the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus
sums paid as Additional Rent. If such insurance cost is increased due to
Tenant's use of the Premises, Tenant agrees to pay to Landlord the full cost of
such increase. Tenant shall have no interest in nor any right to the proceeds of
any insurance procured by Landlord for the Premises. Landlord and Tenant do each
hereby respectively release the other, to the extent of insurance coverage of
the releasing party, from any liability for loss or damage caused by fire or any
of the extended coverage casualties included in the releasing party's insurance
coverage policies, irrespective of the cause of such fire or casualty; provided,
however, that if the insurance policy of either releasing party prohibits such
waiver, then this waiver shall not take effect until consent to such waiver is
obtained. If such waiver is so prohibited, the insured party affected shall
promptly notify the other party thereof.
13. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant
hereby waives all claims against Landlord for any injury to or death of any
person or damage to or destruction of property in or about the Premises by or
from any cause whatsoever, including, without limitation, gas, fire, oil,
electricity or leakage of any character from the roof, walls, basement or other
portion of the Premises but excluding, however, the willful misconduct or
negligence of Landlord, its agents, servants, employees, invitees, or
contractors of which negligence Landlord has knowledge and reasonable time to
correct. Except as to injury to persons or damage to property to the extent
arising from the willful misconduct or the negligence of Landlord, its agents,
servants, employees, invitees, or contractors. Tenant shall hold Landlord
against any and all expenses, including reasonable attorneys' fees, in
connection therewith, arising out of any injury to or death of any person or
damage to or destruction of property occurring in, on or about the Premises, or
any part thereof, from any cause whatsoever.
14. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect, pertaining to said Premises, with the
requirements of any board of fire underwriters or other similar body now or
hereafter constituted; and with any direction or occupancy certificate issued
pursuant to law by any public officer; provided, however, that no such failure
shall be deemed a breach of the provisions if Tenant, immediately upon
notification, commences to remedy or rectify said failure. The judgment of any
court of competent jurisdiction or the
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admission of Tenant in any action against Tenant, whether Landlord be a party
thereto or not, that Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. Tenant shall, at its
sole cost and expense, comply with any and all requirements pertaining to said
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance covering
requirements pertaining to said Premises, of any insurance organization or
company, necessary for the maintenance of reasonable fire and public liability
insurance covering the Premises.
15. LIENS TENANT shall keep the Premises free from any liens arising out of
any work performed, materials furnished or obligation incurred by Tenant. In the
event that Tenant shall not, within ten (10) days following the imposition of
such lien, cause the same to be released of record, Landlord shall have, in
addition to all other remedies provided herein and by law, the right, but no
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant on demand with interest at the
prime rate of interest as quoted by the Bank of America.
16. ASSIGNMENT AND SUBLETTING Tenants shall not assign, transfer, or
hypothecate the leasehold estate under this Lease, or any interest therein, and
shall not sublet the Premises, or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without, in each case, the prior written
consent of Landlord which consent will not be unreasonably withheld. As a
condition for granting this consent to any assignment transfer, or subletting,
Landlord may require that Tenant agrees to pay Landlord, as additional rent,
fifty percent (50%) of all rents or additional consideration ("Excess Rent")
received by Tenant from its assignees, transferees, or subtenants in excess of
the rent payable by Tenant to Landlord hereunder, provided, however, that before
sharing such Excess Rent, Tenant shall first be entitled to recover from such
Excess Rent the amount of any reasonable leasing commissions paid by Tenant to
third parties not affiliated with Tenant. Tenant shall, by thirty (30) days
written notice, advise Landlord of its intent to assign or transfer Tenant's
interest in the Lease or sublet the Premises or any portion thereof for any part
of the term hereof. Within thirty (30) days after receipt of said written
notice, Landlord may, in its sole discretion, elect to terminate this Lease as
to the portion of the Premises described in Tenant's notice on the date
specified in Tenant's notice by giving written notice of such election to
terminate. Notwithstanding the above, Landlord shall not have a right to
terminate said Lease in the event of a sublease, unless Tenant subleases more
than forty percent (40%) of said Leased Premises. If no such notice to terminate
is given to Tenant within said thirty (30) days period, Tenant may proceed to
locate an acceptable sublessee, assignee, or other transferee for presentment to
Landlord for Landlord's approval, all in accordance with the terms, covenants,
and conditions of this paragraph 16. If Tenant intends to sublet the entire
Premises and Landlord elects to terminate this Lease, this Lease shall be
terminated on the date specified in Tenant's notice. If, however, this Lease
shall terminate pursuant to the foregoing with respect to less than all the
Premises, the rent, as defined and reserved hereinabove shall be adjusted on a
pro rata basis to the number of square feet retained by Tenant, and this Lease
as so amended shall continue in full force and effect. In the event Tenant is
allowed to assign, transfer or sublet the
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whole or any part of the Premises, with prior written consent of Landlord, no
assignee, transferee or subtenant shall assign or transfer this Lease, either in
whole or in part, or sublet the whole or any part of the Premises, without also
having obtained the prior written consent of Landlord. As of the date of this
Lease, Landlord represents that there are no direct loans outstanding on the
Premises leased hereunder. A consent of Landlord to one assignment, transfer,
hypothecation, subletting, occupation or use by any other person shall not
release Tenant from any of Tenant's obligations hereunder or be deemed to be a
consent to any subsequent similar or dissimilar assignment, transfer,
hypothecation, subletting, occupation or use by any other person. Any such
assignment, transfer, hypothecation, subletting, occupation or use without such
consent shall be void and shall constitute a breach of this Lease by Tenant and
shall, at the option of Landlord exercised by written notice to Tenant,
terminate this Lease. The leasehold estate under this Lease shall not, nor shall
any interest herein, be assignable for any purpose by operation of law without
the written consent of Landlord. As a condition to its consent, Landlord may
require Tenant to pay all expenses in connection with the assignment, and
Landlord may require Tenant's assignee or transferee (or other assignees or
transferees) to assume in writing all of the obligations under this Lease and
for Tenant to remain liable to Landlord under the Lease. See Paragraph 46
17. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord,
Tenant Shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease and provided Lender executes a reasonable non-disturbance agreement.
Notwithstanding any such subordination, Tenant's possession under this Lease
shall not be disturbed if Tenant is not in default and so long as Tenant shall
pay all rent and observe and perform all of the provisions set forth in this
Lease and any such subordination agreement shall so reflect.
18. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times
during business hours and after at least 24 hours notice (except in emergencies)
have, the right to enter the Premises to inspect them; to perform any services
to be provided by Landlord hereunder; to make repairs or provide any services to
a contiguous tenant(s); to submit the Premises to prospective purchasers,
mortgages or tenants; to post notices of nonresponsibility; and to alter,
improve or repair the Premises or other parts of the building, all without
abatement of rent, and may erect scaffolding and other necessary structures in
or through the Premises where reasonably required by the character of the work
to be performed; provided, however that the business of Tenant shall be
interfered with to the least extent that is reasonably practical. Any entry to
the Premises by Landlord for the purposes provided for herein shall not under
any circumstances be construed or deemed to be a forcible or unlawful entry into
or a detainer of the Premises or an eviction, actual or constructive, of Tenant
from the Premises or any portion thereof. Landlord shall use its best efforts to
minimize its interference with Tenant's business operations during such
entrance.
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19. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired Lease, the trustee or
receiver shall notify Landlord in writing of its election within thirty (30)
days after an order for relief in a liquidation action or within (30) days after
the commencement of any action.
Within thirty (30) days after court approval of the assumption of this
Lease, the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure) any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under said Lease to the reasonable satisfaction of Landlord.
Adequate assurance of future performance, as used herein, includes, but shall
not be limited to: (i) assurance of source and payment of rent, and other
consideration due under this Lease; (ii) assurance that the assumption or
assignment of this Lease will not breach substantially and provision, such as
radius, location, use, or exclusivity provision, in any agreement relating to
the above described Premises.
Nothing contained in this section shall affect the existing right of
Landlord to refuse to accept an assignment upon commencement of or in connection
with a bankruptcy, liquidation, reorganization or insolvency action or an
assignment of Tenant for the benefit of creditors or other similar act. Nothing
contained in this Lease shall be construed as giving or granting or creating
equity in the demised Premises to Tenant. In no event shall the leasehold estate
under this Lease, or any interest therein, be assigned by voluntary or
involuntary bankruptcy proceeding without the prior written consent of Landlord.
In no event shall this Lease or any rights or privileges hereunder be an asset
of Tenant under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or
representation made under this Lease shall constitute default hereunder by
Tenant upon expiration of the appropriate grace period hereinafter provided.
Tenant shall have a period of five (5) days from the date of written notice from
Landlord within which to cure any default in the payment of rental or adjustment
thereto. Tenant shall have a period of thirty (30) days from the date of written
notice from Landlord within which to cure any other default under this Lease;
provided, however, that if the nature of Tenant's failure is such that more than
thirty (30) days is reasonably required to cure the same. Tenant shall not be in
default so long as Tenant commences performance within I such thirty (30) day
period and thereafter prosecutes the same to completion. Upon an uncured default
of this Lease by Tenant, Landlord shall have the following rights and remedies
in addition to any other rights or remedies available to Landlord at law or in
equity:
(a) The rights and remedies provided for by California Civil Code
Section 1951.2, including but not limited to, recovery of the worth at the time
of award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of rental loss for the same period
that Tenant proves could be reasonably avoided, as computed pursuant to
subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs
(2) and (3) of Section 1951.2 of the California Civil Code of the amount of
rental loss that could be reasonably avoided shall be made in the following
manner: Landlord and Tenant shall each select
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a licensed real estate broker in the business of renting property of the same
type and use as the Premises and in the same geographic vicinity. Such two real
estate brokers shall select a third licensed real estate broker, and the three
licensed real estate brokers so selected shall determine the amount of the
rental loss that could be reasonably avoided from the balance of the term of
this Lease after the time of award. The decision of the majority of said
licensed real estate brokers should be final and binding upon the parties
hereto.
(b) The rights and remedies provided by California Civil Code Section
which allows Landlord to continue the Lease in effect and to enforce all of its
rights and remedies under this Lease, including the right to recover rent as it
becomes due, for so long as Landlord does not terminate Tenant's rights to
possession; acts of maintenance or preservation, efforts to relet the Premises,
or the appointment of a receiver upon Landlord's initiative to protect its
interest under this Lease shall not constitute a termination of Tenant's right
to possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) To the extent permitted by law, the right and power, to enter the
Premises and remove therefrom all persons and property, to store such property
in a public warehouse or elsewhere at the cost of and for the account of Tenant,
and to sell such property and apply such proceeds therefrom pursuant to
applicable California law. Landlord, may from time to time sublet the Premises
or any part thereof for such term or terms (which may extend beyond the term of
this Lease) and at such rent and such other terms as Landlord in its reasonable
sole discretion may deem advisable, with the right to make alterations and
repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately
liable to pay Landlord, in addition to indebtedness other than rent due
hereunder, the reasonable cost of such subletting, including, but not limited
to, reasonable attorney's fees, and any real estate commissions actually paid,
and the cost of such reasonable alterations and repairs incurred by Landlord and
the amount, if any, by which the rent hereunder for the period of such
subletting (to the extent such period does not exceed the term hereof) exceeds
the amount to be paid as rent for the Premises for such period or (ii) at the
option of Landlord, rents received from such subletting shall be applied first
to payment of indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any costs of such subletting and of such
alterations and repairs; third to payment of rent due and unpaid hereunder; and
the residue, if any, shall be held by Landlord and applied in payment of future
rent as the same becomes due hereunder. If Tenant has been credited with any
rent to be received by such subletting under option (i) and such rent shall not
be promptly paid to Landlord by the subtenant(s), or if such rentals received
from such subletting under option (ii) during any month be less than that to be
paid during that month by Tenant hereunder, Tenant shall pay any such deficiency
to Landlord. Such deficiency shall be calculated and paid monthly. No taking
possession of the Premises by Landlord shall be construed as an election on its
part to terminate this Lease unless a written notice of such intention is given
to Tenant. Notwithstanding any such subletting without termination, Landlord may
at any time hereafter elect to terminate this Lease for such previous breach.
(e) The right to have a receiver appointed for Tenant upon application
by Landlord, to take possession of the Premises and to apply any rental
collected from the Premises and to exercise all other rights and remedies
granted to Landlord pursuant to subparagraph d. above.
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20. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease (except that Tenant may vacate so long as it pays
rent, provides an on-site security guard during normal business hours form
Monday through Friday, and otherwise performs its obligations hereunder) and if
Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by
the process of law, or otherwise, any personal property belonging to Tenant and
left on the Premises shall be deemed to be abandoned, at the option of Landlord,
except such property as may be mortgaged to Landlord.
21. DESTRUCTION In the event the Premises are destroyed in whole or in part
from any cause, except for routine maintenance and repairs and incidental damage
and destruction caused from vandalism and accidents for which Tenant is
responsible under Paragraph 7, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to the
damage or destruction, or
(b) Terminate this Lease. (providing that the Premises are damaged to
the extent of 33 1/3% of the replacement cost).
If Landlord does not give Tenant notice in writing within (30) days
from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense, except for any deductible, which is the responsibility of Tenant,
promptly to rebuild or restore the Premises to their condition prior to the
damage or destruction. Tenant shall be entitled to a reduction in rent while
such repair is being made in proportion that the area of the Premises rendered
untenantable by such damage bears to the total area of the Premises. If Landlord
initially estimates that the rebuilding or restoration will exceed 180 days, or
if Landlord does not commence repairs within 90 days or complete the rebuilding
or restoration within one hundred eighty (180) days following the date of
destruction (such period of time to be extended for delays caused by the fault
or neglect of Tenant or because of Acts of God, acts of public agencies, labor
disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability
to obtain materials, supplies or fuels, acts of contractors, or subcontractors,
or delay of the contractors or subcontractors due to such causes or other
contingencies beyond the control of Landlord), or if the damage exceeds 33 1/3%
and occurs during the last twelve months of the initial Lease Term or any
extended Term, then Tenant shall have the right to terminate this Lease by
giving fifteen (15) days prior written notice to Landlord. Notwithstanding
anything herein to the contrary, Landlord's obligation to rebuild or restore
shall be limited to the building and interior improvements constructed by
Landlord as they existed as of the commencement date of the Lease and shall not
include restoration of Tenant's trade fixtures, equipment, merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions,
this Lease shall remain in full force and effect. Tenant hereby expressly waives
the provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of
the California Civil Code.
In the event that the building in which the Premises are situated is
damaged or destroyed to the extent of not less than 33 1/3% of the replacement
cost thereof, Landlord may elect to terminate this Lease, whether the Premises
be injured or not. Notwithstanding anything to the
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contrary herein, Landlord may terminate this Lease in the event of an uninsured
event or if insurance proceeds are insufficient to cover one hundred percent of
the rebuilding costs net of the deductible; provided however, Tenant shall have
the right to elect, in its discretion, to contribute such excess funds to permit
Landlord to repair the Premises.
22. EMINENT DOMAIN Landlord shall contest any eminent domain assertion if
Landlord, in its sole and absolute discretion, believes it's prudent to do so.
If all or any part of the Premises shall be taken by any public or quasi-public
authority under the power of eminent domain or conveyance in lieu thereof, this
Lease shall terminate as to any portion of the Premises so taken or conveyed on
the date when title vests in the condemnor, and Landlord shall be entitled to
any and all payment, income, rent, award, or any interest therein whatsoever
which may be paid or made in connection with such taking or conveyance, and
Tenant shall have no claim against Landlord or otherwise for the value of any
unexpired term of this Lease. Notwithstanding the foregoing paragraph, any
compensation specifically awarded Tenant for loss of business; Tenant's personal
property, moving cost or loss of goodwill shall be and remain the property of
Tenant.
If any action or proceeding is commenced for such taking of the
Premises or any part thereof, or if Landlord is advised in writing by any entity
or body having the right or power of condemnation of its intention to condemn
the premises or any portion thereof, then Landlord shall have the right to
terminate this Lease by giving Tenant written notice thereof within sixty (60)
days of the date of receipt of said written advice, or commencement of said
action or proceeding, or taking conveyance, which termination shall take place
as of the first to occur of the last day of the calendar month next following
the month in which such notice is given or the date on which title to the
Premises shall vest in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if
the portion of the Premises taken or conveyed is so substantial that the Tenant
can no longer reasonably conduct its business, Tenant shall have the privilege
of terminating this Lease within sixty (60) days from the date of such taking or
conveyance, upon written notice to Landlord of its intention so to do, and upon
giving of such notice this Lease shall terminate on the lst day of the calendar
month next following the month in which such notice is given, upon payment by
Tenant of the rent from the date of such taking or conveyance to the date of
termination.
If a portion of the Premises be taken by condemnation or conveyance in
lieu thereof and neither Landlord nor Tenant shall terminate this Lease as
provided herein, this Lease shall continue in full force and effect as to the
part of the Premises not so taken or conveyed, and the rent herein shall be
apportioned as of the date of such taking or conveyance so that thereafter the
rent to be paid by Tenant shall be in the ratio that the area of the portion of
the Premises not so taken or conveyed bears to the total area of the Premises
prior to such taking.
23. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of
the Premises or any interest therein, by any owner of the reversion then
constituting Landlord, the transfer or shall thereby be released from any
further liability upon any of the terms, covenants or conditions (express or
implied) herein contained in favor of Tenant, and in such event, insofar as such
transfer is concerned, Tenant agrees to look solely to the responsibility of the
successor in interest of such transferor in and to the Premises and this Lease.
This Lease
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shall not be affected by any such sale or conveyance, and Tenant agrees to
attorn to the successor in interest of such transferor.
24. ATTORNMENT TO LENDER OR THIRD PARTY Subject to Tenant's receipt of an
executed non-disturbance agreement pursuant to Paragraph 17 of this Lease, in
the event the interest of Landlord in the land and buildings in which the leased
Premises are located (whether such interest of Landlord is a fee title interest
or a leasehold interest) is encumbered by deed of trust, and such interest is
acquired by the lender or any third party through judicial foreclosure or by
exercise of a power of sale at private trustee's foreclosure sale, Tenant hereby
agrees to attorn to the purchaser at any such foreclosure sale and to recognize
such purchaser as the Landlord under this Lease. In the event the lien of the
deed of trust securing the loan from a Lender to Landlord is prior and paramount
to the Lease, this Lease shall nonetheless continue in full force and effect for
the remainder of the unexpired term hereof, at the same rental herein reserved
and upon all of the other terms, conditions and convenants herein contained.
25. HOLDING OVER Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly provided
in this Lease. Any holding over after the expiration or other termination of the
term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent
required during the last month of the Lease term.
26. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than
then (10) days prior written notice to Landlord execute, acknowledge and deliver
to Landlord a statement in writing (i) certifying that this Lease is unmodified
and in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging there are not, to Tenant's knowledge,
any uncured defaults on the part of Landlord hereunder, or specifying such
defaults, if any, are claimed. Any such statement may be conclusively relied
upon by any prospective purchaser or encumbrance of the Premises. Tenant's
failure to deliver such statement within such time shall be conclusive upon
Tenant that this Lease is in full force and effect, without modification except
as may be represented by Landlord; that there are no uncured defaults in
Landlord's performance, and that not more than one month's rent has been paid in
advance.
27. CONSTRUCTION CHANGES LANDLORD shall endeavor to construct the Premises
leased hereunder pursuant to Exhibit B to the Lease; however, it is understood
that the description of the Premises and the location of ductwork, plumbing and
other facilities therein are subject to such minor changes as Landlord or
Landlord's architect determines to be desirable in the course of construction of
the Premises, and no such changes shall affect this Lease or entitle Tenant to
any reduction of rent hereunder or result in any liability of Landlord to
Tenant.
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Landlord does not guarantee the accuracy of any drawings supplied to Tenant and
verification of the accuracy of such drawings rests with Tenant.
28. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of
this Lease to be performed or observed by Tenant shall be performed or observed
by Tenant at Tenant's sole cost and expense and without any reduction of rent.
If Tenant shall fail to pay any sum of money, or other rent, required to be paid
by it hereunder or shall fail to perform any other term or covenant hereunder on
its part to be performed, and such failure shall continue for five (5) days
after written notice thereof by Landlord, Landlord, without waiving or releasing
Tenant from any obligation of Tenant hereunder, may, but shall not be obliged
to, make any such payment or perform any such other term or covenant on Tenant's
part to be performed. All sums so paid by Landlord and all necessary costs of
such performance by Landlord together with interest thereon at the rate of the
prime rate of interest per annum as quoted by the Bank of America from the date
of such payment on performance by Landlord, shall be paid (and Tenant covenants
to make such payment) to Landlord on demand by Landlord, and Landlord shall have
(in addition to any other right or remedy of Landlord) the same rights and
remedies in the event of nonpayment by Tenant as in the case of failure by
Tenant in the payment of rent hereunder.
29. ATTORNEYS' FEES
A. In the event that either Landlord or Tenant should bring suit for the
possession of the Premises, for the recovery of any sum due under this Lease, or
because of the breach of any provision of this Lease, or for any other relief
against the other party hereunder, then all costs and expenses, including
reasonable attorneys' fees incurred by the prevailing party therein shall be
paid by the other party, which obligation on the part of the other party shall
be deemed to have accrued on the date of the commencement of such action and
shall be enforceable whether or not the action is prosecuted to judgment.
B. Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant
shall pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorney's fee subject to the provisions of Paragraph 13.
30. WAIVER The wavier by either party of the other party's failure to
perform or observe any term, covenant or condition herein contained to be
performed or observed by such waiving party shall not be deemed to be a waiver
of such term, covenant or condition or of any subsequent failure of the party
failing to perform or observe the same or any other such term, covenant or
condition therein contained, and no custom or practice which may develop between
the parties hereto during the term hereof shall be deemed a waiver of, or in any
way affect, the right of either party to insist upon performance and observance
by the other party in strict accordance with the terms hereof.
31. NOTICES All notices, demands, requests, advices or designations which
may be or are required to be given by either party to the other hereunder shall
be in writing. All notices, demands, requests, advices or designations by
Landlord to Tenant shall be sufficiently given, made or delivered if personally
served on Tenant by leaving the same at the Premises of if sent
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by United States certified or registered mail, postage prepaid, addressed to
Tenant at the Premises. All notices, demands, requests, advices or designations
by Tenant to Landlord shall be sent by United States certified or registered
mail, postage prepaid, addressed to Landlord at its offices at Peery/Arrillaga,
2560 Mission College Blvd., Suite 101, Santa Clara, CA 95054. Prior to Tenant's
occupancy of the Premises, all notices by Landlord to Tenant shall be sent to
Tenant's current offices at 1380 Willow Road, Menlo Park, CA 94025. Each notice,
request, demand, advice or designation referred to in this paragraph shall be
deemed received on the date of the personal service or, mailing thereof in the
manner herein provided, as the case may be.
32. EXAMINATION OF LEASE Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
33. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event earlier than (30) days after written notice by Tenant to Landlord and to
the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have heretofore been furnished to Tenant in writing,
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
34. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the
by-laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or partnership)
in accordance with its terms. If Tenant is a corporation, Tenant shall, within
thirty (30) days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease.
35. BASIC RENT ADJUSTMENT
(Deleted)
36. LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder.
Tenant and all successors and assigns covenant and agree that, in the event of
any actual or alleged failure, breach or default hereunder by Landlord:
(a) the sole and exclusive remedy shall be against Landlord's
interest in the Premises leased herein;
(b) no partner of Landlord shall be sued or named as a party in
any suit or action (except as may be necessary to secure
jurisdiction of the partnership);
(c) no service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of
the partnership);
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(d) no partner of Landlord shall be required to answer or
otherwise plead to any service of process
(e) no judgment will be taken against any partner of Landlord;
(f) any judgment taken against any partner of Landlord may be
vacated and set aside at any time without hearing;
(g) no writ of execution will ever be levied against the assets of
any partner of Landlord;
(h) these covenants and agreements are enforceable both by
Landlord and also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall
be applicable to any covenant or agreement either expressly contained in this
Lease or imposed by statute or at common law.
37. SIGNS No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice without notice to
and at the expense of Tenant. If Tenant is allowed to print or affix or in any
way place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on outside doors shall be printed,
painted, affixed or inscribed at the expense of Tenant by a person approved of
by Landlord.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door partition or wall, which may appear unsightly from
outside the Premises.
38. MISCELLANEOUS AND GENERAL PROVISIONS
A. Use of Building Name. Tenant shall not, without the written
consent of Landlord, use the name of the building for any
purpose other than as the address of the business conducted by
Tenant in the Premises.
B. Choice of Law; Severability. This Lease shall in all respects
be governed by and construed in accordance with the laws of
the State of California. If any provision of this Lease shall
be invalid, unenforceable or ineffective for any reason
whatsoever, all other provisions hereof shall be and remain in
full force and effect.
C. Definition of Terms. The term "Premises" includes the space
leased hereby and any improvements now or hereafter installed
therein or attached thereto. The term "Landlord" or any
pronoun used in place thereof includes the plural as well as
the singular and the successors and assigns of Landlord. The
term "Tenant" or any pronoun used in place thereof includes
the plural as well as the singular and individuals, firms,
associations, partnerships and corporations, and their and
each of their respective heirs, executors, administrators,
successors and permitted assigns, according to the context
hereof, and the provisions of this Lease shall inure to the
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benefit of and bind such heirs, executors, administrators,
successors and permitted assigns.
The term "person" includes the plural as well as the singular
and individuals, firms, associations, partnerships and corporations.
Words used in any gender include other genders. If there be more than
one Tenant the obligations of Tenant hereunder are joint and several.
The paragraph headings of this Lease are for convenience of reference
only and shall have no effect upon the construction or interpretation
of any provision hereof.
D. Time of Essence. Time is of the essence of this Lease and of each and
all of its provisions.
E. Quitclaim. At the expiration or earlier termination of this Lease,
Tenant shall execute, acknowledge and deliver to Landlord, within ten
(10) days after written demand from Landlord to Tenant, any quitclaim
deed or other document required by any reputable title company,
licensed to operate in the State of California, to remove the cloud or
encumbrance created by this Lease from the real property of which
Tenant's Premises are a part.
F. Incorporation of Prior Agreements; Amendments. This instrument along
with any exhibits and attachments hereto, including the Construction
Letter of even date, hereof, constitutes the entire agreement between
Landlord and Tenant relative to the Premises and this agreement and the
exhibits and attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and
Tenant agree hereby that all prior or contemporaneous oral agreements
between and among themselves and their agents or representatives
relative to the leasing of the Premises are merged in or revoked by
this agreement.
G. Recording. Neither Landlord nor Tenant shall record this Lease or a
short form memorandum hereof without the consent of the other.
H. Amendments for Financing. Tenant further agrees to execute any
amendments required by a lender to enable Landlord to obtain financing,
so long as Tenant's rights hereunder are not substantially affected.
I. Additional Paragraphs. Paragraphs 39 through 54 are added hereto and
are included as part of this lease.
J. Clauses, Plats and Riders. Clauses, plats and riders, if any, signed by
Landlord and Tenant and endorsed on or affixed to this Lease are a part
hereof.
K. Diminution of Light, Air or View. Tenant covenants and agrees that no
diminution or shutting off of light, air or view by any structure which
may be hereafter erected (whether or not by Landlord) shall in any way
affect this Lease, entitle Tenant to any reduction of rent hereunder or
result in any liability of Landlord to Tenant
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Paragraphs 39 through 54 to Lease Agreement Dated November 25, 1996, By
and Between the Arrillaga Family Trust and the Richard T. Peery
Separate Property Trust, as Landlord, and Versant Object Technology
Corporation, a California corporation, as Tenant for 54,492+ Square
Feet of Space Located at 6539 Dumbarton Circle, Fremont, California.
39. BASIC RENT Subject to Paragraphs 2A, 2B and 3 and in accordance with
Paragraph 4A herein, the total aggregate sum of ELEVEN MILLION TWO HUNDRED
SEVENTY NINE THOUSAND EIGHT HUNDRED FORTY FOUR AND NO/100 DOLLARS
($11,279,844.00), shall be payable as follows:
On June 1, 1997, the sum of EIGHTY ONE THOUSAND SEVEN HUNDRED THIRTY
EIGHT AND NO/100 DOLLARS ($81,738.00) shall be due, and a like sum due on the
first day of each month thereafter, through and including May 1, 1998.
On June 1, 1998, the sum of EIGHTY FOUR THOUSAND FOUR HUNDRED SIXTY TWO
AND 60/100 DOLLARS ($84,462.60) shall be due, and a like sum due on the first
day of each month thereafter, through and including May 1, 1999.
On June 1, 1999, the sum of EIGHTY SEVEN THOUSAND ONE HUNDRED EIGHTY
SEVEN AND 20/100 DOLLARS ($87,187.20) shall be due, and a like sum due on the
first day of each month thereafter, through and including May 1, 2000.
On June 1, 2000, the sum of EIGHTY NINE THOUSAND NINE HUNDRED ELEVEN
AND 80/100 DOLLARS ($89,911.80) shall be due, and a like sum due on the first
day of each month thereafter, through and including May 1, 2001.
On June 1, 2001, the sum of NINETY TWO THOUSAND SIX HUNDRED THIRTY SIX
AND 40/100 DOLLARS ($92,636.40) shall be due, and a like sum due on the first
day of each month thereafter, through and including May 1, 2002.
On June 1, 2002, the sum of NINETY FIVE THOUSAND THREE HUNDRED SIXTY
ONE AND NO/100 DOLLARS ($95,361.00) shall be due, and a like sum due on the
first day of each month thereafter, through and including May 1, 2003.
On June 1, 2003, the sum of NINETY EIGHT THOUSAND EIGHTY FIVE AND
60/100 DOLLARS ($98,085.60) shall be due, and a like sum due on the first day of
each month thereafter, through and including May 1, 2004.
On June 1, 2004, the sum of ONE HUNDRED THOUSAND EIGHT HUNDRED TEN
AND 20/100 DOLLARS ($100,810.20) shall be due, and a like sum due on the first
day of each month thereafter, through and including May 1, 2005.
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On June 1, 2005, the sum of ONE HUNDRED THREE THOUSAND FIVE HUNDRED
THIRTY FOUR AND 80/100 DOLLARS ($103,534.80) shall be due, and a like sum due on
the first day of each month thereafter, through and including May 1, 2006.
like sum due on the first
On June 1, 2006, the sum of ONE HUNDRED SIX THOUSAND TWO HUNDRED FIFTY NINE
AND 40/100 DOLLARS ($106,259.40) shall be due, and a like sum due on the first
day of each month thereafter, through and including May 1, 2007; or until the
entire aggregate sum of ELEVEN MILLION TWO HUNDRED SEVENTY NINE THOUSAND EIGHT
HUNDRED FORTY FOUR AND NO/100 DOLLARS ($11,279,844.00) has been paid.
40. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consent shall not be unreasonably withheld.
41. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the teens, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
42. EXPENSES OF OPERATION, MANAGEMENT AND MAINTENANCE OF THE DRIVEWAY, PARKING
LOT AND LANDSCAPED AREAS OF THE PARCEL, ON WHICH THE PREMISES ARE LOCATED: It is
understood by Landlord and Tenant that the areas outlined in Orange on Exhibit A
attached hereto are considered Common Areas; said Common Areas are limited to
the cave way entrance; the fountain (if any) and landscaping included in said
Common Areas. Landlord shall maintain, repair and replace as needed said
improvements within the Common Areas and Tenant shall pay its pro-rata share of
the total costs for all such work completed in the Common Areas; unless,
however, Tenant is responsible for damage to the same which has resulted in said
repairs and/or replacement, in which case Tenant shall pay one hundred percent
(100%) of said costs. Landlord shall also maintain on behalf of Tenant, the
non-Common Area landscape areas, asphalt paved areas (including the Parking Lot)
and sidewalks on the Premises and Tenant shall pay one hundred percent (100%) of
those costs. The cost incurred in both the Common Areas and non-Common Areas
include, but are not limited to license, permit and inspection fees; utility
charges associated with exterior landscaping and lighting, all charges incurred
in the maintenance, repair and replacement as necessary of the: landscaped
areas, fountains (if any), parking lots, parking lot lighting, sidewalks,
driveways, maintenance, repair and replacement of all fountains (if any) and
fountain related fixtures and electrical, mechanical and plumbing systems;
supplies, materials, equipment and tools; the cost of capital expenditures which
have the effect of reducing operating expenses, provided, however, that in the
event Landlord makes such capital improvements, Landlord may amortize its
investment in said improvements (together with interest at the rate of fifteen (
15%) percent per annum on the unamortized balance) as an operating expense in
accordance with standard accounting practices, provided, that such amortization
is not at a rate greater than the anticipated savings in the operating expenses.
Tenant hereby waives all rights hereunder, and benefits of,
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subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil
Code and under any similar law, statute or ordinance now or hereafter in effect.
Said costs for Tenant shall pay services provided by Landlord as Additional Rent
in accordance with Paragraph 4D of the Lease.
43. ADDITIONAL RENT CONTINUED: Notwithstanding anything to the contrary in
Paragraph 4D, the following items shall be excluded from "Additional Rent":
1. Leasing commissions, attorney's fees, costs, disbursements, and
other expenses incurred in connection with negotiations with other tenants, or
disputes between Landlord and other tenants, or in connection with leasing,
renovating, or improving space outside the Leased Premises for other current or
prospective tenants or other current or prospective occupants of the Complex.
2. The cost of any service sold to any other tenant or other occupant
for which Landlord is entitled to be reimbursed as an additional charge or
rental over and above the basic rent and escalations payable under the lease
with said other tenant or other occupant.
3. Any costs for which Landlord is reimbursed by others.
4. Any costs, fines, or penalties incurred due to violations by
Landlord of any governmental rule or authority.
44. ASSIGNMENT OF WARRANTIES: During the Term of the Lease, Landlord hereby
assigns to Tenant all of Landlord's Contractor's warranties and shall cooperate
with Tenant in enforcing any of such warranties except that Landlord shall not
be required to pay any legal fees or incur any expenses in this regard.
45. ASSESSMENT CREDITS: The demised property herein may be subject to a
special assessment levied by the City of Fremont as part of an Improvement
District. As a part of said special assessment proceedings (if any), additional
bonds were or may be sold and assessments were or may be levied to provide for
construction contingencies and reserve funds. Interest shall be earned on such
funds created for contingencies and on reserve funds, which will be credited for
the benefit of, said assessment district. To the extent surpluses are created in
said district through unused contingency funds, interest earnings or reserve
funds, such surpluses shall be deemed the property of Landlord. Notwithstanding
that such surpluses may be credited on assessments otherwise due against the
Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the
time of any such credit of surpluses, an amount equal to all such surpluses so
credited For example: if (i) the property is subject to an annual assessment of
$1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's
assessment which reduces the assessment amount shown on the property tax bill
from $1,000.00 to $800.00, Tenant shall, upon receipt) of notice from Landlord,
pay to Landlord said $200.00 credit as Additional Rent.
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46. ASSIGNMENT AND SUBLETTING (CONTINUED):
A. In addition to and notwithstanding anything to the contrary in Paragraph
16 of this Lease, Landlord hereby agrees to consent to Tenant's assigning or
subletting said Lease and not to receive any Excess Rent (as described in
Paragraph 16) to: (i) any parent or subsidiary corporation, affiliate, or
corporation with which Tenant merges or consolidates, provided that the net
worth of said parent or subsidiary corporation, affiliate, or said corporation
has a net worth equal to or greater than the net worth of Tenant at the time of
such assignment, merger, or consolidation; or (ii) any third party or entity to
whom Tenant sells all or substantially all of its assets; provided, that the net
worth of the resulting or acquiring corporation has a net worth after the
merger, consolidation or acquisition equal to or greater than the net worth of
Tenant at the time of such merger, consolidation or acquisition. No such
assignment or subletting will release the Tenant from its liability and
responsibility under this Lease to the extent Tenant continues in existence
following such transaction. Notwithstanding the above, Tenant shall be required
to (a) give Landlord written notice prior to such assignment or subletting to
any party as described in (i) and (ii) above, and (b) execute Landlord's consent
document prepared by Landlord reflecting the assignment or subletting.
B. Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to the
requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any reason
whatsoever, to terminate the Master Lease prior to the scheduled Master Lease
termination date, then this Sublease (if then still in effect) shall terminate
concurrently with the termination of the Master Lease. Subtenant expressly
acknowledges and agrees that (1) the voluntary termination of the Master Lease
by Landlord and Tenant and the resulting termination of this Sublease shall not
give Subtenant any right or power to make any legal or equitable claim against
Landlord, including without limitation any claim for interference with contract
or interference with prospective economic advantage, and (2) Subtenant hereby
waives any and all rights it may have under law or at equity against Landlord to
challenge such an early termination of the Sublease, and unconditionally
releases and relieves Landlord, and its officers, directors, employees and
agents, from any and all claims, demands, and/or causes of action whatsoever
(collectively, "Claims"), whether such matters are known or unknown, latent or
apparent, suspected or unsuspected, foreseeable or unforeseeable, which
Subtenant may have arising out of or in connection with any such early
termination of this Sublease. Subtenant knowingly and intentionally waives any
and all protection which is or may be given by Section 1542 of the California
Civil Code which provides as follows: "A general release does not extend to
claims which the creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have materially
affected his settlement with debtor.
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration of and
agreement to this early termination provision, ((b)) Subtenant's acknowledgment
that, in determining the net benefits to be derived
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by Subtenant under the terms of this Sublease, Subtenant has anticipated the
potential for early termination, and (c) Subtenant's agreement to the general
waiver and release of Claims above.
47. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect
to the existence or use of "Hazardous Materials" (as defined herein) on, in,
under or about the Premises and real property located beneath said Premises and
the common areas of the Parcel, which includes the entire parcel of land on
which the Premises are located as shown in Green on Exhibit A attached hereto
(hereinafter collectively referred to as the "Property"):
A. As used herein, the term "Hazardous Materials" shall mean any
material, waste, chemical, mixture or byproduct which is or hereafter is
defined, listed or designated under Environmental Laws ((defined below) as a
pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or
material, or any other unwholesome, hazardous, toxic, biohazards, or radioactive
material, waste, chemical, mixture or byproduct, or which is listed, regulated
or restricted by any Environmental Law, / (including, without limitation,
petroleum hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated biphenyls, or asbestos). As used herein, the term
"Environmental Laws" shall mean any applicable Federal, State of California or
local government law (including common law) statute, regulation, rule,
ordinance, permit, license, order, requirement, agreement, or approval, or any
determination, judgment, directive, or order of any executive or judicial
authority at any level of Federal, State of California or local government
(whether now existing or subsequently adopted or promulgated) relating to
pollution or the protection of the environment, ecology, natural resources, or
public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be
withheld in Landlord's discretion, prior to the occurrence of any Tenant's
Hazardous Materials Activities (defined below); provided, however, that
Landlord's consent shall not be required for normal use in compliance with
applicable Environmental Laws of customary household and office supplies (Tenant
shall first provide Landlord with a list of said materials use), such as mild
cleaners, lubricants and copier toner. As used herein, the term "Tenant's
Hazardous Materials Activities" shall mean any and all use, handling,
generation, storage, disposal, treatment, transportation, discharge, or emission
of any Hazardous Materials on, in, beneath, to, from, at or about the Property,
in connection with Tenant's use of the Property, or by Tenant or by any of
Tenant's agents, employees, contractors, vendors, invitees, visitors or its
future subtenants or assignees. Tenant agrees that any and all Tenant's
Hazardous Materials Activities shall be conducted in strict, full compliance
with applicable Environmental Laws at Tenant's expense, and shall not result in
any contamination of the Property or the environment. Tenant agrees to provide
Landlord with prompt written notice of any spill or release of Hazardous
Materials at the Property during the term of the Lease of which Tenant becomes
aware, and further agrees to provide Landlord with prompt written notice of any
violation of Environmental Laws in connection with Tenant's Hazardous Materials
Activities of which Tenant becomes aware. If Tenant's Hazardous Materials
Activities involve Hazardous Materials other than normal use of customary
household and office supplies, Tenant also agrees at Tenant's expense: (i) to
install such Hazardous Materials monitoring, storage and containment devices as
Landlord reasonably deems necessary (Landlord shall have no obligation to
evaluate the need for any such installation
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or to require any such installation); (ii) provide Landlord with a written
inventory of such Hazardous Materials, including an update of same each year
upon the anniversary date of the Commencement Date of the Lease ("Anniversary
Date"); and (iii) on each Anniversary Date, to retain a qualified environmental
consultant, acceptable to Landlord, to evaluate whether Tenant is in compliance
with all applicable Environmental Laws with respect to Tenant's Hazardous
Materials Activities. Tenant, at its expense, shall submit to Landlord a report
from such environmental consultant, which discusses the environmental
consultant's findings within two (2) months of each Anniversary Date. Tenant, at
its expense, shall promptly undertake and complete any and all steps necessary,
and in full compliance with applicable Environmental Laws, to fully correct any
and all problems or deficiencies identified by the environmental consultant, and
promptly provide Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its
expense, shall (i) properly remove from the Property all Hazardous Materials
which come to be located at the Property in connection with Tenant's Hazardous
Materials Activities, and (ii) fully comply with and complete all facility
closure requirements of applicable Environmental Laws regarding Tenant's
Hazardous Materials Activities, including but not limited to (x) properly
restoring and repairing the Property to the extent damaged by such closure
activities, and (y) obtaining from the local Fire Department or other
appropriate governmental authority with jurisdiction a written concurrence that
closure has been completed in compliance with applicable Environmental Laws.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
such closure activities.
D. If Landlord, in its sole discretion, believes that the Property has
become contaminated as a result of Tenant's Hazardous Materials Activities,
Landlord in addition to any other rights it may have under this Lease or under
Environmental Laws or other laws, by providing advance written notice, may enter
upon the Property and conduct inspection, sampling and analysis, including but
not limited to obtaining and analyzing samples of soil and groundwater, for the
purpose of determining the nature and extent of such contamination. Tenant shall
promptly reimburse Landlord for the reasonable costs of such an investigation,
including but not limited to reasonable attorneys' fees Landlord incurs with
respect to such investigation, that discloses Hazardous Materials contamination
for which Tenant is liable [under this Lease. Except as may be required of
Tenant by applicable Environmental Laws, Tenant shall not perform any sampling,
testing, or drilling to identify the presence of any Hazardous Materials at the
Property, without Landlord's prior written consent which may be withheld in
Landlord's discretion. Tenant shall promptly provide Landlord with copies of any
claims, notices, work plans, data and reports prepared, received or submitted in
connection with any sampling, testing or drilling performed pursuant to the
preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to
Landlord, whose consent shall not unreasonably be withheld) and hold harmless
Landlord, its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and nil claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but not
limited to reasonable attorneys', consultants'
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and other experts' fees and costs), and damages, which arise from or relate to:
(i) Tenant's Hazardous Materials Activities; (ii) releases or discharges of I
Hazardous Materials at the Property, which occur during the Term of this Lease,
(iii) any Hazardous Materials contamination caused by Tenant prior to the
Commencement Date of the Lease; or (iv) the breach of any obligation of Tenant
under this Paragraph 47 (collectively, "Tenant's Environmental
Indemnification"). Tenant's Environmental Indemnification shall include but is
not limited to the obligation to promptly and fully reimburse Landlord for
losses in or reductions to rental income, and diminution in fair market value of
the Property. Tenant's Environmental Indemnification shall further include but
is not limited to the obligation to diligently and properly implement to
completion, at Tenant's expense, any and all environmental investigation,
removal, remediation, monitoring, reporting, closure activities, or other
environmental response action (collectively, "Response Actions"). Tenant shall
promptly provide Landlord with copies of any claims, notices, work plans, data
and reports prepared, received or submitted in connection with any Response
Actions.
As evidenced by their initials set forth immediately below, Tenant acknowledges
that Landlord has provided Tenant with copies of the environmental reports
listed on Exhibit C ("Reports"), and Tenant acknowledges that Tenant and
Tenant's experts (if any) have had ample opportunity to review such reports and
that Tenant has satisfied itself as to the environmental conditions of the
Property and the suitability of such conditions for Tenant's intended use of the
Property. To the best of Landlord's knowledge as of the date of this Lease,
except as noted in said reports, no additional on site Hazardous Materials
contamination exist on the Property, however. Landlord shall have no obligation
to further investigate.
It is agreed that the Tenant's responsibilities related to Hazardous Materials
will survive the expiration or termination of this Lease and that Landlord may
obtain specific performance of Tenant's responsibilities under this Paragraph
47.
48. ASSOCIATION DUES: The Premises leased hereunder is part of the Ardenwood
Property Owner's Association (the "Association"), and is subject to Association
Dues to fund the cost of the Association's obligations and expenses as
authorized under said Agreement. As of the date of this Lease, Tenant's current
prorate share of the Association Dues is currently estimated at $2,468.49 per
year and is subject to adjustment as provided for by said Association Said
Association Dues are payable by Tenant to Landlord as Additional Rent on a
monthly basis throughout the Term of this Lease. Tenant understands that it will
not be a direct member of the Association.
49. TAXES CONTINUED:
A. In addition to and notwithstanding anything to the contrary contained in
Paragraph 9, it is agreed that Tenant shall have the right to request Landlord
to contest, or to have contested, the real estate taxes end/or assessments
levied against the Premises leased hereunder with the
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specific understanding and agreement that any such contest shall in no way and
in no event relieve Tenant from Tenant's responsibility to pay all real estate
taxes and assessments as they appear on the tax bill as they become due. In the
event any such tax contest is successful, the proportionate portion of the net
refund, once received by Landlord, relating to real estate taxes and assessments
actually paid by Tenant shall be refunded to Tenant. It is further understood
and agreed that Landlord shall in no event be responsible for any liability or
for any cost or expense incurred by Tenant by reason of Tenant's contest of
such taxes and/or assessments.
B. Notwithstanding anything within Paragraph 9, in the event prior to
the Commencement Date there is an interim or supplemental reassessment of the
Premises based upon the added value of the Improvements, then when Tenant
accepts occupancy of the Premises Tenant shall pay any interim or supplemental
taxes (but no penalties or interest in connection therewith) that have been
levied against the Premises so are attributable to the added value of the
Improvements (as defined in the Construction Letter of even date herewith)
during the period prior to Tenant's occupancy of the Premises. As of the Lease
Commencement Date, Tenant shall be responsible for paying one hundred percent
(100%) of the Real Property Taxes as provided for in Paragraph 9.
C. Notwithstanding anything within Paragraph 9, it is agreed that if
any special assessments for capital improvements are assessed, and if Landlord
has the option to either pay the entire assessment in cash or go to bond, and if
Landlord elects to pay the entire assessment in cash in lieu of going to bond,
the entire portion of the assessment assigned to Tenant's Leased Premises will
be prorated over the same period that the assessment would have been prorated
had the assessment gone to bond.
50. SUBDIVISION: Landlord an Tenant agree that the Premises and the Parcel
outlined in Green on Exhibit A attached hereto are subject to change and/or
modification once the parcel lot lines are adjusted and said revised parcel
dimensions are recorded. The parities agree that Exhibit A shall be replaced
with a revised and corrected Exhibit A-1, indicating any revisions to the site
plan, including specific parking stall locations and/or lot line adjustments.
51. ADDRESS FOR LEASED PREMISES: It is understood that (I) the current
address for the building in which the Premises are located is 6539 Dumbarton
Circle, Fremont, California, and that (ii) the address for the Premises will be
assigned by the City of Fremont (the "City") upon issuance of a building permit
for the Interior Improvements as defined herein. In the event the address
assigned to the Premises is changed by the City, said Lease shall thereafter be
amended to reflect the assigned address for the Premises leased hereunder.
52. OPTION TO EXTEND LEASE FOR FIVE (5) YEARS: Provided Tenant is not in
default (pursuant to Paragraph 19 of the Lease, i.e., Tenant has received notice
and any applicable cure period has expired without cure) in any of the terms,
covenants, and conditions of this Lease Agreement, Landlord hereby grants to
Tenant and Option to Extend this Lease Agreement for an additional five (5) year
period upon the following terms and conditions:
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A. Tenant shall give Landlord written notice of Tenant's exercise of
this Option to Extend not later that twelve (12) months prior to the scheduled
Lease Termination Date, which Termination Date is currently projected to May 31,
2007, in which event the Lease shall be considered extended for an additional
five (5) years subject to the Basic Rental set forth below and with: (i) the
terms and conditions subject to amendment by Landlord (landlord, in its sole and
absolute discretion, may, but is not required to, incorporate its current Lease
provision that are standard in Landlord's leases as of the date of Tenant's
exercise of its Option to Extend); and (ii) this Paragraph 52 deleted. In the
event that Tenant fails to timely exercise Tenant's option as set forth herein
in writing, Tenant shall have no further Option to Extend this Lease, and this
Lease shall continue in full force and effect for the full remaining term
hereof, absent this Paragraph 52.
B. In the event Tenant timely exercises Tenant's Option to Extend as
set forth herein, Landlord shall, within fifteen (15) days after receipt of
Tenant's exercise of option, advise Tenant of the Basic Rental required for the
Extended Term of the Lease. The initial monthly Basic Rent charged during the
Extended Term shall be the higher of: (I) $2.00 per square foot per month or
(ii) an amount equal to the monthly Basic Rent during the last month of the
initial Lease Term. Said initial monthly Basic Rent, once established, shall be
subject to annual adjustment during the Extended Term by, at Landlord's sole and
absolute discretion, either (a) a fixed increase of $0.50 per square foot per
month or (b) the annual increase in the Consumer Price Index. Tenant shall have
five (5) days after receipt from the Landlord of said new Basic Rental in which
to accept said new Basic Rental and enter into written documentation confirming
it. In the event Tenant fails to execute said written documentation confirming
said new Basic Rental for the Extended Term of Lease within said (5) day period,
Tenant shall have no further Option to Extend this Lease, and this Lease shall
continue in full force and effect for the full remaining term hereof absent of
this Paragraph 52, with Landlord having no further responsibility or obligation
to Tenant with respect to Tenant's Option to Extend.
C. The option rights of Tenant under this Paragraph 52, and the
Extended Term thereunder, are granted for Tenant's personal benefit and may not
be assigned or transferred by Tenant, (except to a parent or subsidiary
corporation, or corporation with which Tenant merges or consolidates or the whim
Tenant sells all or substantially all of its assets as provided for in
Paragraph 46A), either voluntarily or by operation of law, in any manner
whatsoever. In the event that Landlord consents to a sublease or assignment
under Paragraph 10, the option granted herein and any Extended Term thereunder
shall be void and of no force and effect, whether or not Tenant shall have
purported to exercise such option prior to such assignment or sublease.
D. INCREASED SECURITY DEPOSIT: In the event the Term of Tenant's Lease
is extended pursuant to this Paragraph 52, Tenant's Security Deposit shall be
increased to equal twice the Basic Rental due for the last month of the Extended
Term (For Example: if the last month's Basic Rental during the Extended Term is
$92,400.00, the revised Security Deposit shall be $184,800.00 ($92,400.00 per
month X2)).
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53. LANDLORD'S RIGHT TO TERMINATE: It is understood that the Premises to be
leased by Tenant are to be constructed by Landlord, and that Landlord is
required to obtain the necessary building permits before construction of said
Premises can commence. Therefore it is agreed that in the event Landlord cannot
obtain all the necessary building permits for said Premises within 180 days from
the date this executed Lease is received by Landlord, that Landlord can
terminate this Lease Agreement without any liability to Tenant, of any type
whatsoever, and that this Lease Agreement will be null and void as of the date
of said cancellation. Landlord agrees to use its best efforts to obtain the
required permits within the aforementioned 1 80-day period.
54. MAINTENANCE OF THE PREMISES: Notwithstanding anything to the contrary in
Paragraph 7, Landlord shall repair damage to the structural shell, foundation,
and roof structure (but not the interior improvements, roof membrane, or
glazing) of the building leased hereunder at Landlord's cost, Landlord shall
amortize the cost of the repair over the useful life of said repair, and Tenant
shall be responsible for paying to Landlord one hundred percent (100%) of
Tenant's pro rata share of the amortization of said COSI over the full Term
remaining in the Lease at the time the repair is made; provided Tenant has not
caused such damage, in which event Tenant shall be responsible for 100 percent
of any such costs for repair or damage so caused by the Tenant. For Example: In
the event (i) the roof purlin is repaired at a cost of $ 10,000, and (ii) said
repair purlin has a useful life of twenty years, and (iii) Tenant has one year
remaining in its Lease Term al the time said repair was made, Tenant would be
charged its prorate share of $500 ($10,000/20 years x 1 year = $500)) as
Additional Rent, in which case said amount would be due within thirty (30) days
of notice from Landlord. Tenant hereby waives all rights under, and benefits of
subsection I of Section 1932 and Sections 1941 and 1942 of the California Civil
Code and under any similar law, statute or ordinance now or hereafter in effect.
Notwithstanding the foregoing, a crack in the foundation or exterior walls that
does not endanger the structural integrity of the building, or which is not
life-threatening, shall not be considered material, nor shall Landlord be
responsible for repair of same.
In the event the Term of the Lease is extended, pursuant to Paragraph 52
("Option to Extend Lease for Five (5) Years") or by any other agreement between
Landlord and Tenant, Tenant's pro rata share of the earlier repair cost shall be
increased to include the additional amount payable IO Landlord due IO the
Extended Term of the Lease. For Example: In the event: (i) the roof purlin was
repaired as illustrated above; and (ii) Tenant exercises its Option to Extend
this Lease for an additional five year period, Tenant would be liable for an
additional payment to Landlord of $2,500 as Additional Rent. Said payment would
be due in full immediately upon Tenant's exercise of its Option to Extend.
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IN WITNESS WHEREOF, Landlord or Tenant have executed and delivered this
Lease as of the day and year last written below.
LANDLORD: TENANT:
ARRILLAGA FAMILY TRUST VERSANT OBJECT TECHNOLOGY
CORPORATION
a California corporation
By: ____________________________ By:
_____________________________________
John Arrillaga, Trustee
Date: ___________________________ Title:
_____________________________________
RICHARD T. PEERY, SEPARATE Type or Print Name: ______________________________
PROPERTY TRUST
By: _____________________________ Date:
___________________________________________
Richard T. Peery, Trustee
Date: ____________________________
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<PAGE> 33
MAP OF FACILITY SITE
Exhibit A To lease agreement dated November 25, 1996 by and between the
Arrillaga Family Trust and the Richard T. Peery Separate Property Trust, as
Landlord, and Versant Object Technology Corporation, as Tenant.
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PRELIMINARY PLAN
VERSANT OBJECT TECHNOLOGY
BUILDING
Exhibit B To lease agreement dated November 25, 1996 by and between the
Arrillaga Family Trust and the Richard T. Peery Separate Property Trust, as
Landlord, and Versant Object Technology Corporation, as Tenant.
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<PAGE> 35
$ 106,259.40
Building: Ardenwood II-I
Date Due: June 1, 1998
PROMISSORY NOTE
THE UNDERSIGNED, Versant Object Technology Corporation, a California
corporation, , hereby promises, covenants and agrees to pay to the Arrillaga
Family Trust and the Richard T. Peery Separate Properly Trust, at Santa Clara,
California, the principal sum of ONE HUNDRED SIX THOUSAND TWO HUNDRED FIFTY NINE
AND 40/100 DOLLARS ($ 106,259.40) without interest on or before June 1, 1998.
This sum is final payment of a Security Deposit provided for in accordance with
the Lease Agreement between the parties dated November 25, 1996, for
approximately 54,492+ square feet of space located at 6539 Dumbarton Circle,
Fremont, California. The parties' rights to payment, nonpayment or refund of the
sum due under this Note shall be governed solely by the above Lease Agreement.
IN THE EVENT the undersigned defaults in the timely payment of this
Note, the undersigned shall pat to holder, in addition to the principal sum due
hereunder, interest thereon at the then existing highest interest rate
chargeable by law from June 1, 1997 until this Note is paid in full.
IN THE EVENT legal action is taken to enforce the provisions of this
Note, the undersigned, does promise, covenant, and agree to pay, in addition to
the principal due hereunder and any interest accrued thereon, attorney fees
and/or court costs incurred by Holder by reason of such enforcement of the
provisions herein contained whether or not such action is prosecuted to
judgement.
THIS NOTE shall be governed and construed according to the laws of the
State of California.
IN WITNESSES WHEREOF, the undersigned have/has executed this Promissory
Note as of the 7th day of February, 1997.
VERSANT OBJECT TECHNOLOGY CORPORATION
a California corporation
By
RICHARD I. KADET
VICE PRESIDENT
Type or Print Name
Title
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<PAGE> 1
EXHIBIT 11.01
COMPUTATION OF NET INCOME (LOSS) PER SHARE
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
Net income (loss) $ 1,410,800 $ (1,232,187)
=========== ============
Weighted average number
of shares outstanding:
Common stock 5,930,599 2,987,199
Common stock equivalents:
Convertible preferred shares 1,299,510 2,367,424
SAB 83 Calculation 182,430 578,716
Warrants 556 0
Options 367,525 0
----------- -----------
7,780,620 5,933,339
=========== ===========
Net income (loss) per share $ 0.18 $ (0.21)
======= =======
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-KSB, into the
Company's previously filed Registration Statement on Form S-8
(File No. 333-08537).
ARTHUR ANDERSEN LLP
San Jose, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) the
statements of operations and balance sheets and is qualified in its entirety by
reference to such (b) financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 5,267
<SECURITIES> 14,716
<RECEIVABLES> 5,350
<ALLOWANCES> 603
<INVENTORY> 0
<CURRENT-ASSETS> 198
<PP&E> 3,999
<DEPRECIATION> 3,324
<TOTAL-ASSETS> 25,688
<CURRENT-LIABILITIES> 6,001
<BONDS> 0
0
0
<COMMON> 40,889
<OTHER-SE> (21,615)
<TOTAL-LIABILITY-AND-EQUITY> 25,688
<SALES> 18,393
<TOTAL-REVENUES> 18,393
<CGS> 0
<TOTAL-COSTS> 4,131
<OTHER-EXPENSES> 13,151
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 1,540
<INCOME-TAX> 129
<INCOME-CONTINUING> 1,411
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,411
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
