<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-28540
VERSANT CORPORATION
(Exact name of Small Business Issuer as specified in its charter)
<TABLE>
<CAPTION>
California 94-3079392
<S> <C>
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization
</TABLE>
6539 Dumbarton Circle
Fremont, California 94555
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (510) 789-1500
Check whether the Issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of common stock, no par value, outstanding
as of October 31, 1999: 10,180,058
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
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VERSANT CORPORATION
FORM 10-QSB
Quarterly Period Ended September 30, 1999
Table of Contents
Part I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements Page No.
--------
<S> <C>
Condensed Consolidated Balance Sheets -- September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations -- Three and Nine Months Ended September 30, 1999
and 1998 4
Condensed Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8K 21
Signatures 22
</TABLE>
2
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VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED) *
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,050 $ 3,564
Accounts receivable, net 7,484 5,878
Other current assets 866 1,318
------- -------
Total current assets 11,400 10,760
Property and equipment, net 5,939 7,381
Other assets 249 433
Excess of cost of investment over fair value of
net assets acquired 1,772 2,095
------- -------
Total assets $19,360 $20,669
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 2,389 $ 2,426
Current maturities of long-term debt 1,510 2,223
Current portion of capitalized lease obligations 380 561
Accounts payable 901 2,331
Accrued liabilities 2,501 3,692
Deferred revenue 2,984 2,830
------- -------
Total current liabilities 10,665 14,063
------- -------
Long-term liabilities, net of current portion:
Deferred revenue 512 704
Long-term notes payable -- 3,678
Capitalized lease obligations 132 369
------- -------
Total liabilities 11,309 18,814
------- -------
Shareholders' equity:
Preferred Stock 5,672 --
Common stock 47,265 45,727
Accumulated deficit (44,887) (43,890)
Cumulative other comprehensive income 1 18
------- -------
Total shareholders' equity 8,051 1,855
------- -------
Total liabilities and shareholders' equity $19,360 $20,669
======= =======
</TABLE>
* Derived from audited financial statements
The accompanying notes are an integral part of these statements.
3
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VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
License $ 4,511 $ 3,627 $ 13,149 $ 10,661
Services 2,186 2,247 6,810 6,342
-------- ------- -------- --------
Total revenue 6,697 5,874 19,959 17,003
Cost of revenue:
License 142 635 608 1,735
Services 960 1,578 3,258 5,214
-------- ------- -------- --------
Total cost of revenue 1,102 2,213 3,866 6,949
Gross profit 5,595 3,661 16,093 10,054
Operating expenses:
Marketing and sales 1,951 4,105 7,507 13,414
Research and development 1,775 1,867 5,491 5,517
General and administrative 911 928 2,570 2,828
Amortization of goodwill 116 122 347 364
Acquired in-process research
and development cost -- 524 -- 524
-------- ------- -------- --------
Total operating expenses 4,753 7,546 15,915 22,647
Income (loss) from operations 842 (3,885) 178 (12,593)
Other expense (107) (170) (496) (363)
Write-off of unamortized note (646) -- (646) --
discount (see note 7)
-------- ------- -------- --------
Other expense, net (753) (170) (1,142) (363)
-------- ------- -------- --------
Income (loss) before provision for 89 (4,055) (964) (12,956)
taxes
Provision for taxes 23 -- 32 14
-------- ------- -------- --------
Net income (loss) $ 66 $(4,055) $ (996) $(12,970)
======== ======= ======== ========
Basic net income (loss) per share $ 0.01 $ (0.44) $ (0.10) $ (1.42)
======== ======= ======== ========
Diluted net income (loss) per share $ 0.00 $ (0.44) $ (0.10) $ (1.42)
======== ======= ======== ========
Basic weighted average common shares 10,174 9,245 10,152 9,122
Diluted weighted average common and
potential common shares 13,550 9,245 10,152 9,122
</TABLE>
The accompanying notes are an integral part of these statements.
4
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VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (996) $(12,970)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,792 1,811
Write-off of unamortized note discount 646 --
Accrued interest on Vertex note 299 --
Provision for doubtful accounts 85 334
Changes in operating assets and liabilities:
Accounts receivable (1,691) 3,082
Prepaid expenses and other current assets 452 (198)
Deposits and other assets 184 (304)
Accounts payable (1,430) 1,281
Accrued liabilities and taxes (1,191) (285)
Deferred revenue (38) (930)
------- --------
Net cash used in operating activities (1,888) (8,179)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (28) (1,910)
Proceeds from sale and maturities of short-term investments -- 6,112
Acquisition of Soft Mountain, net of cash acquired -- (437)
------- --------
Net cash provided by (used in) investing activities (28) 3,765
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and warrants 136 757
Net proceeds from sale of preferred stock 2,451 --
Principal payments under long term note -- (168)
Principal payments under capital lease obligations (418) (458)
Net borrowings (payments) on short term note and bank debt (750) 1,777
------- --------
Net cash provided by financing activities 1,419 1,908
------- --------
Effect of exchange rate changes on cash (17) (11)
------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (514) (2,518)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,564 3,717
======= ========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,050 $ 1,199
======= ========
Non-cash financing activities:
Conversion of convertible debt to convertible preferred
stock $ 3,847 $ --
======= ========
</TABLE>
The accompanying notes are an integral part of these statements
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
Versant Corporation ("Versant" or the "Company"), without audit, pursuant to
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements and the notes thereto
should be read in conjunction with the Company's audited financial statements
included in the Company's Form 10-KSB for the year ended December 31, 1998 filed
with the SEC. The unaudited information has been prepared on the same basis as
the annual financial statements and, in the opinion of the Company's management,
reflects all normal recurring adjustments necessary for a fair presentation of
the information for the periods presented. The interim results presented herein
are not necessarily indicative of the results of operations that may be expected
for the full fiscal year ending December 31, 1999, or any other future period.
The Company is subject to the risks associated with other companies in a
comparable stage of development. These risks include, but are not limited to,
fluctuations in operating results, seasonality, a lengthy sales cycle,
dependence on the acceptance of object database technology, competition, a
limited customer base, dependence on key individuals, product concentration, and
the potential need for additional financing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue consists mainly of revenue earned under software license agreements,
maintenance agreements and consulting and training activities.
Revenue from perpetual software license agreements is recognized as revenue upon
shipment of the software if there is no significant modification of the
software, payments are due within the Company's normal payment terms and
collection of the resulting receivable is probable. If an acceptance period is
required, revenue is recognized upon the earlier of customer acceptance or the
expiration of the acceptance period.
The Company has entered into contracts with certain of its customers that
require the Company to perform development work in return for nonrecurring
engineering fees. Revenue related to such nonrecurring engineering fees is
generally recognized on a percentage of completion basis.
Maintenance revenue is recognized ratably over the term of the maintenance
contract. Consulting and training revenue is recognized when a customer's
purchase order is received and the services are performed.
Cost of license revenue consists principally of product royalty obligations,
product packaging, freight, users manuals, product media, production labor costs
and reserves for estimated bad debts.
Cost of services revenue consists principally of personnel costs associated with
providing training, consulting, technical support and nonrecurring engineering
work paid for by customers.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted net income
(loss) per share is computed by dividing net income (loss) by the sum of the
weighted average number of common shares outstanding plus the dilutive effect of
shares issuable through the exercise of stock options and warrants. The dilutive
effect of stock options is computed using the treasury stock method. Potential
common stock is excluded from the diluted net income (loss) per share
computation if its effect is antidilutive.
Basic net income(loss) per share was computed using the weighted average number
of shares outstanding. Diluted net income per share for the quarter ended
September 30, 1999 was based on the diluted weighted average common and
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potential common shares. The diluted net loss per share for the quarter ended
September 30, 1998 and the nine month periods ended September 30, 1999 and 1998
was the same as basic net loss per share due to losses in this quarter thus the
inclusion of potential common shares would have been antidilutive. The number of
weighted average potential common shares not included in the diluted net loss
per share calculation for the quarter ended September 30, 1998, was 73,058,
because they were antidilutive.
3. COMPREHENSIVE INCOME (LOSS)
A summary of comprehensive income (loss) follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------------
1999 1998 1999 1998
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Net income(loss) $ 66 $(4,055) $ (996) $(12,970)
Foreign currency translation adjustment (15) (14) (17) (257)
-------- ------- ------- --------
Comprehensive (loss) income $ 51 $(4,069) $(1,013) $(13,227)
======== ======= ======= ========
</TABLE>
4. SEGMENT INFORMATION
In 1998 the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131 "Disclosures About Segments of an Enterprise and Related Information."
SFAS No. 131 established standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services, and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision making group is the Executive Management Committee,
which is comprised of the Chief Executive Officer, the Chief Financial Officer
and various Executive Vice Presidents of the Company.
The Company is organized geographically and by line of business. The Company has
three major lines of business operating segments: license, support, and
consulting/training. However, the Company also evaluates certain lines of
business segments by vertical industries as well as by product categories. While
the Executive Management Committee evaluates results in a number of different
ways, the line of business management structure is the primary basis for which
it assesses financial performance and allocates resources.
The license line of business licenses an object oriented database management
software (ODBMS). The ODBMS software can be classified into two broad
categories: systems and development tools, which enables users to create, store,
retrieve, and modify the various types of data stored in a computer system. The
support line of business provides customers with a wide range of support
services that include on-site support, telephone or internet access to support
personnel, as well as software upgrades. The consulting and training line of
business provides customers with a wide range of consulting and training
services to assist the customer in evaluating, installing and customizing the
database as well as training classes on the use and operation of the Company's
products.
The accounting policies of the line of business operating segments are the same
as those described in the summary of significant accounting policies.
The Company does not track assets by operating segments. Consequently, it is not
practicable to show assets by operating segment.
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The table below presents a summary of operating segments (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------------
1999 1998 1999 1998
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues from Unaffiliated Customers
License $ 4,511 $ 3,627 $13,149 $ 10,661
Support 1,329 1,075 4,190 3,205
Consulting & Training 857 1,172 2,620 3,137
------- ------- ------- --------
Total Revenue 6,697 5,874 19,959 17,003
Distribution Margin
License 4,369 2,992 12,541 8,926
Support 942 654 3,052 988
Consulting & Training 284 15 500 140
------- ------- ------- --------
Total Distribution Margin 5,595 3,661 16,093 10,054
Profit Reconciliation:
Other Operating Expenses 4,753 7,546 15,915 22,647
Other Expense, net (753) (170) (1,142) (363)
------- ------- ------- --------
Income(Loss) Before Provision for
Income Taxes $ 89 $(4,055) $ (964) $(12,956)
======= ======= ======= ========
</TABLE>
The table below presents the Company's revenues by legal subsidiary (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------------
1999 1998 1999 1998
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Total Revenues Attributable To:
United States/Canada $ 4,149 $ 3,312 $10,614 $ 9,695
Germany 539 1,184 3,150 2,538
France 1,448 886 2,588 1,686
United Kingdom 299 325 2,790 1,798
Australia/Asia Pacific 262 167 817 1,286
------- ------- ------- --------
Total $ 6,697 $ 5,874 $19,959 $17,003
======= ======= ======= =======
</TABLE>
5. LINE OF CREDIT
The Company maintains a revolving credit line with a bank that expires on
September 30, 2000. The maximum amount that can be borrowed under the revolving
credit line is $5.0 million. As of September 30, 1999, $900,000 was allocated to
a standby letter of credit to support the Company's European banking line and
$2.4 million of borrowings were outstanding. Borrowings and the standby letter
of credit under the revolving credit line are limited to 80% of eligible
accounts receivable and are secured by a lien on substantially all of the
Company's assets. These borrowings bear interest at the bank's base lending
rate, currently at 8.25%, plus 2.0%. The loan agreement contains financial
covenants, commencing with this quarter ending September 30, 1999, and also
prohibits cash dividends and mergers and acquisitions without the bank's prior
approval. Certain of these new covenants, which the Company was not in
compliance with as of September 30, 1999, have been waived through such date.
On March 19, 1998, the Company converted an interest only, variable rate note to
a variable rate, term loan with principal and interest payable over 36 months.
The term loan covenants and interest rate were amended in conjunction with the
new line of credit agreement. The amended financial covenants will commence with
this quarter ending September 30, 1999. Borrowings under the loan are secured by
a lien on all assets acquired using the proceeds of the loan, which have been
used for the acquisition of equipment and leasehold improvements. The loan bears
interest at the
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bank's base lending rate, currently at 8.25%, plus 2.5%. The loan contains
certain financial covenants and also prohibits cash dividends and mergers and
acquisitions without the bank's prior approval. Certain of these new covenants,
which the Company was not in compliance with as of September 30, 1999, have been
waived through such date.
6. LEGAL PROCEEDINGS
The Company and certain of its present and former officers and directors were
named as defendants in four class action lawsuits filed in the United States
District Court for the Northern District of California, filed on January 26,
1998, February 5, 1998, March 11, 1998 and March 18, 1998, respectively. On June
19, 1998, a Consolidated Amended Complaint was filed in the above mentioned
court, by the lead Plaintiff named by the court. The amended complaint alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and
Securities and Exchange Commission Rule 10b-5 promulgated under the Securities
Exchange Act, in connection with public statements about the Company's expected
financial performance. The complaint seeks an unspecified amount of damages. The
Company vigorously denies the plaintiffs' claims and has moved to dismiss the
allegations. The Plaintiff has filed a response to the Company's motion to
dismiss and the Company has filed an opposition to Plaintiff's response. The
motion to dismiss was submitted to the court for consideration on November 13,
1998 and the court has not yet issued a decision. Securities litigation can be
expensive to defend, consume significant amounts of management time and result
in adverse judgments or settlements that could have a material adverse effect on
the Company's results of operations and financial condition.
The selling shareholders of the Soft Mountain shares (see Note 11 of the
footnotes to the consolidated financial statements, in the annual 10-KSB for
December 31, 1998) have demanded that the Company repurchase for approximately
$1.1 million the 245,586 shares of the Company's common stock issued to them in
conjunction with the Company's purchase of all of Soft Mountain's shares. The
demand alleges that the Company has not registered the shares issued in the
transaction in a timely manner. The Company disputes the right of such
shareholders to receive such payment, however any potential settlement could
result in the payment of cash or the issuance of additional Versant stock.
Settlement discussions are ongoing. Arbitration or litigation may result if a
settlement cannot be reached. On April 9, 1999, the Company filed a Form S-3
registration statement for shares of the Company's common stock issued to the
Soft Mountain shareholders and others. The registration statement became
effective May 14, 1999.
7. VERTEX NOTE CONVERSION AND EQUITY FINANCING
In July 1999, the Company converted $3,846,551 of principal and interest
outstanding under the Note to Vertex (see Note 12 of the footnotes to the
consolidated financial statements, in the annual 10-KSB for December 31, 1998)
into 902,946 shares of Series A Convertible Preferred Stock (Preferred Stock).
The Company had an initial $846,000 of "note discount" (discount) associated
with the Vertex convertible note requiring the Company to recognize the
differential value between market and below market equity conversion feature as
a discount. The discounted value has been amortized equally over the life of the
note, as an interest expense on the income . Upon the early conversion of the
Note, the balance of the unamortized discount was charged to interest expense
during the third quarter of 1999. In addition, the Company issued 586,853 shares
of Preferred Stock to a Vertex affiliate and other investors in consideration
for $2,499,994. Each share of Preferred Stock is initially convertible into two
shares of Common Stock. Each share of Preferred Stock votes like one share of
Common Stock until converted.
In connection with the issuance of Preferred Stock, the Company issued warrants
to purchase 1,489,799 shares of the Company's Common Stock for cash
consideration of $73,357. The warrants have an exercise price of $2.13 per
share, are immediately exercisable and expire upon the earlier of:
(1) July 11, 2004,
(2) an acquisition of the Company (whether by merger, consolidation, tender
offer or otherwise) in which the Company's shareholders prior to the
acquisition own less than a majority of the surviving corporation, or
the sale of all or substantially all of the Company's assets, or
(3) 15 business days after the Company gives notice to the holder that the
Company's stock price has closed above $12.00 for forty-five
consecutive business days.
The fair value of the warrants was estimated to be approximately $1.5 million on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
(1) risk free interest rate of 6.0%,
(2) expected dividend yields of zero,
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(3) expected volatility factor of the market price of the common stock of
80% and
(4) an expected life of the warrants of 2 years.
The Preferred Stock has a participating liquidation preference over the
Company's common stock initially equal to 150% of the full amount paid for such
stock, which preference increases by an additional 50% per year over each of the
next two years, so long as the Preferred Stock is outstanding. The Preferred
Stock automatically converts into Common Stock if the Company's common stock
price exceeds $12.00 per share for forty-five consecutive business days.
Neither the Preferred Stock nor the warrants have been registered under the
Securities Act of 1933, and may not be offered or sold in the United States
absent registration or an exemption from applicable registration requirements.
Holders of the Preferred Stock and warrants have certain registration rights
relating to the Common Stock issuable upon the conversion of the Preferred Stock
or exercise of the warrants. The Company is obligated to file a registration
statement on Form S-3 to register these shares of Common Stock and did so on
August 16, 1999. The Company expects to accelerate the effectiveness of such
registration statement during November 1999 and is obligated to maintain such
effectiveness until July 11, 2002.
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(I) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
This Management's Discussion and Analysis or Plan of Operation includes a number
of forward-looking statements within the meaning of the Securities Exchange Act
of 1934 (the Securities Act) which reflect our current views with respect to
future events and financial performance. We have identified, with a preceding
asterisk, various sentences within this Form 10-QSB which contain such
forward-looking statements and words such as "believe," "anticipate," "expect,"
"intend" and similar expressions are also intended to identify forward looking
statements, but these are not the exclusive means of identifying such
statements. The forward looking statements included in this Form 10-QSB involve
numerous risks and uncertainties which are described throughout this Form
10-QSB, including under "Revenues" and "Risk Factors" within this Item 2. Please
also refer to our December 31, 1998 10-KSB on file with the Securities and
Exchange Commission and any more recent quarterly reports, the section labeled
"Risk Factors" for additional disclosure information. The actual results that we
achieve may differ materially from any forward looking statements due to such
risks and uncertainties.
We were incorporated in August 1988 and commenced commercial shipments of our
principal product, the Versant ODBMS, in 1991. Since that time, substantially
all of our revenue has been derived from:
(1) sales of development, deployment and project licenses for the Versant
ODBMS
(2) sales of the peripheral products for the Versant ODBMS
(3) related maintenance and support, training, consulting and nonrecurring
engineering fees received in connection with providing services
associated with the Versant ODBMS and
(4) the resale of licenses, maintenance, training and consulting for
third-party products that complement the Versant ODBMS
During the third quarter of 1999, the Company entered into one large pre-paid
license agreement accounting for $1,050,000 in license revenue and approximately
nine smaller customer license agreements, averaging between $100,000 to
$550,000. This reflects the Company's efforts to generate recurring revenue
opportunities and improve our ability to forecast revenues and consequently
manage expenses by focusing more on smaller and recurring license opportunities
with our current and potential customers than on large pre-paid project
licenses. Prior to 1998, a significant portion of our total revenue has been
derived from a limited number of large pre-paid licenses. *In addition, we seek
to develop relationships with best-of-class value-added resellers in the
telecommunications and financial services markets in order to strengthen our
indirect sales activity, although we may not be successful in developing such
relationships and such value-added resellers may not be successful in reselling
our products.
*Additionally, our emphasis on electronic business or"eBusiness" infrastructure
has yielded benefits, as a substantial portion of this third quarter's 1999
revenue is attributable to this area. In June of this year, Versant announced
the extension of its application server integration, available for BEA's
WebLogic(a) since late 1998, to IBM's WebSphere(b). The WebSphere integration
was key to our engaging significant opportunities and winning a successful
deployment at France Telecom in September 1999. *We believe the rapid adoption
of application servers for eBusiness applications has been demonstrated and
represents a significant new growth market for Versant. *In prior quarters we
have taken significant actions to decrease our operating expenses in previous
quarters, and we believe our operating expenses are now in line with our revenue
mix and level.
Worldwide headcount as of September 30, 1999 was 113 compared to the September
30, 1998 total of 170. However, our ability to manage expenses given the
unpredictability of our revenues is uncertain, and we are required to maintain a
significant infrastructure in order to develop, market and support our products.
(a) Indicates trademark of BEA Systems Inc.
(b) Indicates trademark of International Business Machines Corporation.
11
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RESULTS OF OPERATIONS
The following table sets forth the percentages that income statement items
compare to total revenue for the three and nine months ended September 30, 1999
and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------
1999 1998 1999 1998
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenue:
License 67.4% 61.7% 65.9% 62.7%
Services 32.6% 38.3% 34.1% 37.3%
----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue:
License 2.1% 10.8% 3.1% 10.2%
Services 14.4% 26.9% 16.3% 30.7%
----- ----- ----- -----
Total cost of revenue 16.5% 37.7% 19.4% 40.9%
Gross profit 83.5% 62.3% 80.6% 59.1%
Operating expenses:
Marketing and sales 29.1% 69.9% 37.6% 78.9%
Research and development 26.5% 31.8% 27.5% 32.4%
General and administrative 13.6% 15.8% 12.9% 16.6%
Amortization of goodwill 1.7% 2.1% 1.7% 2.1%
Acquired in-process research
and development cost -- 8.9% -- 3.1%
----- ----- ----- -----
Total operating expenses 70.9% 128.5% 79.7% 133.1%
Income (loss) from operations 12.6% (66.1%) 0.9% (74.0%)
Other expense, net (11.3%) (2.9%) (5.7%) (2.1%)
----- ----- ----- -----
Income (loss) before taxes 1.3% (69.0%) (4.8%) (76.1%)
Provision for taxes .3% -- 0.2% 0.1%
----- ----- ----- -----
Net income (loss) 1.0% (69.0%) (5.0%) (76.2%)
===== ===== ===== =====
</TABLE>
REVENUE
Total revenue increased 14.0% from $5.9 million in the third quarter of 1998 to
$6.7 million in the third quarter of 1999. This increase in total revenue was
due to an increase in license revenues. Total revenue increased 17.4% from $17.0
million for the nine month period ending September 30, 1998 to $20.0 million for
the corresponding period ending September 30, 1999. This increase in total
revenue was due to an increase in both license and services revenue.
License revenue
License revenue increased 24.4% from $3.6 million in the third quarter of 1998
to $4.5 million in the third quarter of 1999. License revenue increased 23.3% to
$13.1 million for the nine month period ending September 30, 1999, from $10.7
million for the corresponding period in 1998. License revenue increased in the
third quarter of 1999 to 67.4% of total revenue compared to 61.7% in the third
quarter of 1998. License revenue increased for the nine month period ending
September 30, 1999 to 65.9% of total sales compared to 62.7% for the
corresponding period in 1998. These increases were the result of an increase in
runtime licenses from current customers as well as the addition of new
development license customers. See our December 31, 1998 10-KSB, on file with
the SEC, section labeled "Risk Factors -- Our revenue levels are unpredictable."
12
<PAGE> 13
Services revenue
Services revenue decreased 2.7% from $2.3 million in the third quarter of 1998
to $2.2 million in the third quarter of 1999. This decrease was due to reduced
consulting revenues. Services revenue increased 7.4% to $6.8 million, for the
nine month period ending September 30, 1999, from $6.3 million in the
corresponding period in 1998. This increase was due to increases in both
maintenance and training revenue.
International revenue
International revenue remained flat at $2.5 million in the third quarter of 1999
compared to the third quarter of 1998. International revenue increased 27.9% to
$9.3 million, for the nine month period ending September 30, 1999, from $7.3
million in the corresponding period in 1998. The increase in international
revenue during 1999 compared to 1998 resulted primarily from higher sales in
Europe. This increase in international revenue resulted from the Company's
increased marketing and sales investment, as well as the September 1998
acquisition of Soft Mountain. *We intend to maintain our sales and marketing
activities outside the United States, including Europe, Japan and other
Asia/Pacific countries, which will require significant management attention and
financial resources, and which may increase costs and impact margins unless and
until corresponding revenue is achieved. International revenue as a percentage
of total revenue decreased for the third quarter 1999 to 38% from 44% in 1998
but increased to 47% for the nine month period ending September 30, 1999 from
43% for the corresponding period in 1998. *Due to our increased emphasis on
international sales, especially through Versant Europe, we expect international
revenue to remain a significant percentage of total revenue.
COST OF REVENUE AND GROSS PROFIT
Total cost of revenue decreased 50.2% to $1.1 million in the third quarter of
1999 from $2.2 million in the third quarter of 1998. Total cost of revenue
decreased 44.4% to $3.9 million for the nine month period ending September 30,
1999, from $6.9 million in the corresponding period in 1998. This decrease was
the result of three factors. First, there was a substantial cost reduction in
the service organization due to our restructuring efforts completed during the
first quarter of 1999. Second, the amortization of certain deferred license
costs associated with the acquisition of Versant Europe was completed at the end
of 1998. Third, the provision for bad debt reserves was lower in 1999 compared
to 1998. Total cost of revenue as a percentage of total revenues decreased to
16.5% in the third quarter of 1999 and 19.4% for the nine month period ending
September 30, 1999 from 37.7% and 40.9%, respectively, in the corresponding
periods in 1998.
Cost of license revenue
Cost of license revenue consists primarily of amortization of deferred license
costs associated with the acquisition of Versant Europe (for 1998 only),
provisions for bad debt reserves, product royalty obligations incurred by us
when we sublicense tools provided by third parties, royalty obligations incurred
by us under porting services agreements, user manuals, product media, product
packaging, production labor costs and freight. Cost of license revenue decreased
77.6% to $142,000 in the third quarter of 1999 compared to $635,000 in the third
quarter of 1998. Cost of license revenue decreased 65.0% to $608,000 for the
nine month period ending September 30, 1999, from $1.7 million for the
corresponding period in 1998. This decrease was the result of the elimination of
amortization expense of certain deferred license costs associated with the
acquisition of Versant Europe, reduced provisions for bad debt reserves and
reduced production costs associated with the restructuring in January 1999. As a
result of these decreased costs, cost of license revenue as a percentage of
license revenues decreased to 3.1% for the third quarter 1999 and 4.6% for the
nine month period ending September 30, 1999 compared to 17.5% and 16.3%,
respectively, for the corresponding periods in 1998. As part of the acquisition
of Versant Europe, we allocated $1.4 million of the purchase price to deferred
license costs. In the third quarter and nine month period of 1999, we recognized
none of these deferred license costs as a cost of license revenue versus
$250,000 and $750,000, respectively, for the corresponding periods in 1998.
Cost of services revenue
Cost of services revenue consists principally of personnel costs associated with
providing consulting, training, technical support and nonrecurring engineering
work paid for by customers. Cost of services revenue decreased 39.2% to $960,000
in the third quarter of 1999 compared to $1.6 million in the third quarter of
1998. Cost of services revenue
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<PAGE> 14
decreased 37.5% to $3.3 million for the nine month period ending September 30,
1999, from $5.2 million for the corresponding period in 1998. These decreases
were attributable to the restructuring activities completed in January 1999.
Cost of services revenue as a percentage of services revenue decreased to 43.9%
for the third quarter 1999 and 47.8% for the nine month period ending September
30, 1999 compared to 70.2% and 82.2%, respectively, for the corresponding
periods in 1998. *We expect cost of services revenue to be a significant
percentage of services revenue because we need to maintain a significant
services organization due to the lack of third-party service support, the
difficulty in forecasting billable service demand, the unevenness of demand for
services (which have historically been reduced during holiday periods) and
pricing pressure on fees for services encountered in connection with license
sales. *We also expect to experience increased compensation pressures as a
result of the intense demand for managers and engineers in Silicon Valley, which
we may not be able to offset with increases in the fees we charge for
maintenance and training and consulting projects due to competitive pressures
and restrictions in contractual provisions regarding associated services. Since
December 31, 1998 we have restructured our operations to reduce employee costs
and associated expenses. Worldwide headcount as of September 30, 1999 was 113
compared to September 30, 1998 total of 170. See our December 31, 1998 10-KSB,
on file with the SEC, section labeled "Risk Factors - We rely on
telecommunications and financial services markets characterized by complexity
and intense competition."
MARKETING AND SALES EXPENSES
Marketing and sales expenses consist primarily of marketing and sales personnel
costs, including sales commissions, recruiting, travel, sales offices, product
descriptive literature, seminars, trade shows, product management, depreciation,
occupancy expense, lead generation and mailings. Marketing and sales expenses
decreased 52.5% to $1.9 million in the third quarter of 1999 compared to $4.1
million in the third quarter of 1998. Marketing and sales expenses decreased
44.0% to $7.5 million for the nine month period ending September 30, 1999, from
$13.4 million for the corresponding period in 1998. These decreases were
attributable to the restructuring activities completed in Q1 of 1999. *We
expect, in Q4 1999, marketing and sales expenses will increase slightly in
absolute dollar terms but will decrease as a percentage of revenue from third
quarter 1999 levels, due to our efforts to control headcount, commission costs
and costs associated with marketing programs. *Our operating results will be
adversely affected if our marketing and sales expenditures increase more than
planned or increased revenues are not achieved. As a percentage of total
revenues marketing and sales expenses decreased to 29.1% for the third quarter
1999 and 37.6% for the nine month period ending September 30, 1999 compared to
69.9% and 78.9%, respectively, for the corresponding periods in 1998. These
significant decreases in both periods were the result of reduced expenses and
higher revenues.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries, other
personnel-related expenses, depreciation or the expensing of development
equipment, occupancy expenses, travel, supplies and the costs of an ISO 9001
quality program. Research and development expenses decreased 4.9% to $1.8
million in the third quarter of 1999 compared to $1.9 million in the third
quarter of 1998. Research and development expenses remained flat at $5.5 million
for the nine month period ending September 30, 1999, and for the corresponding
period in 1998. The decrease for the three month period was attributable to the
restructuring activities completed in Q1 of 1999. *We believe that a significant
level of research and development expenditures is required to remain competitive
and complete products under development. *Accordingly, we anticipate that we
will continue to devote substantial resources to research and development to
design, produce and increase the quality, competitiveness and acceptance of our
products. *Due to increased development efforts under way, we expect research
and development expenses to increase compared to the third quarter 1999 levels
in absolute dollar terms but to decrease as a percentage of revenues in 1999.
However, if we increase our research and development efforts more than planned
or do not increase revenues, our results of operations could be adversely
affected in the short term. To date, all research and development expenditures
have been expensed as incurred. As a percent of total revenues, research and
development costs decreased to 26.5% for the third quarter 1999 and 27.5% for
the nine month period ending September 30, 1999 compared to 31.8% and 32.4%
respectively, for the corresponding periods in 1998. The decrease in both
periods was due to higher revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of salaries, recruiting
and other personnel-related expenses for our accounting, human resources,
management information systems, legal and general management functions. In
addition, general and administrative expenses include outside legal, audit and
public reporting costs. General and administrative expenses decreased 1.8% to
$911,000 in the third quarter of 1999 compared to $928,000 in the third quarter
of 1998. General and administrative expenses decreased 9.1% to $2.6 million for
the nine month period ending
14
<PAGE> 15
September 30, 1999, from $2.8 million for the corresponding period in 1998.
These decreases were attributable to the restructuring activities completed in
Q1 of 1999. *We expect, in Q4 of 1999, our quarterly general and administrative
expenses to increase slightly in absolute dollar terms but decrease as a
percentage of revenues from third quarter 1999 level. *However, if our G&A
expenses increase more than planned or revenues do not increase over third
quarter 1999 levels then our results of operations would be adversely affected.
As a percentage of total revenues, general and administrative costs decreased to
13.6% for the third quarter 1999 and 12.9% for the nine month period ending
September 30, 1999 compared to 15.8% and 16.6% respectively, for the
corresponding periods in 1998. The decrease in both periods was also due to
lower expenses and higher revenues.
AMORTIZATION OF GOODWILL
The acquisition of Versant Europe in March 1997 resulted in our recording an
intangible asset representing the cost in excess of fair value of the net assets
acquired in the amount of $3.3 million, which is being amortized over a
seven-year period. During the third quarter of 1999, we amortized $49,000 while
in the third quarter of 1998 the Company amortized $122,000. For the nine month
period ending September 30, 1999 we amortized $147,000. This reduction of
amortization costs relates to our write down of the Versant Europe goodwill by
$1.6 million in the fourth quarter of 1998, due to our revised estimated
discounted cash flow over the next five years. *We will amortize a total of
$196,000 of this remaining goodwill amount in 1999. The acquisition of Soft
Mountain in September 1998 resulted in our recording an intangible asset
representing the cost in excess of fair value of the net assets acquired in the
amount of $1.2 million, which is being amortized over a five-year period. During
the third quarter of 1999, we amortized $61,200 of this amount and for the nine
month period we amortized $183,000. *We will amortize a total of $245,000 of
this amount in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by approximately $500,000 from $3.6 million
at December 31, 1998 to $3.1 million at September 30, 1999. The decrease was due
primarily to the use of cash to fund operations, offset by proceeds from the
preferred stock issue (see note 7 "Vertex Note Conversion and Equity
Financing"). We had no short-term investments on December 31, 1998 or September
30, 1999, however management expects that, in the future, cash in excess of
current requirements will be invested in short-term, interest-bearing,
investment grade securities.
For the nine month period ending September 30, 1999 our operating activities
used $1.9 million of cash and cash equivalents primarily as a result of funding
the net loss, and negative changes in operating assets and liability balances,
offset by increases in depreciation, amortization and provisions for doubtful
accounts. Investing activities used a small amount of net cash as a result of
purchasing newer, more efficient equipment. Financing activities generated net
cash of $1.4 million due to the sale of common and preferred stock, but was
offset by principle payments on our bank and lease financing arrangements.
Total assets decreased by 6% from $20.7 million at December 31, 1998 to $19.4
million at September 30, 1999. The decrease in total assets was primarily due to
the reduction in cash, other current assets and net property and equipment
balances as depreciation expense far exceeded the additional assets added in the
nine month period ending September 30, 1999. *We have and will continue to make
certain investments in software applications and systems to ensure that our
products are Year 2000 compliant. In particular, our purchase of approximately
$9 million of property and equipment during 1997 and 1998 included substantial
investments in management and information systems designed to be Year 2000
compliant. We are currently in the process of completing our implementation of
Year 2000 hardware and software upgrades for Year 2000 compliance as well as
completing our contingency plans for non-compliant suppliers and providers of
third-party technology that may be integrated with our products. In the event
that any of our significant suppliers or customers, or such third-party
technology providers, does not successfully and timely achieve Year 2000
compliance, our business or operations could be adversely affected. See "Risk
Factors -- Our business may be harmed by Year 2000 problems."
Total liabilities decreased 40% from $18.8 million at December 31, 1998 to $11.3
million at September 30, 1999. This decrease was due to reductions in all
liability accounts, however the areas contributing the greatest reductions were:
long term notes, accounts payables, accrued liabilities, bank and lease debt.
For additional information see note 7 "Vertex Note Conversion and Equity
Financing" regarding the conversion of approximately $3.8 million of debt into
equity in July 1999.
15
<PAGE> 16
Total shareholders' equity increased from $1.9 million at December 31, 1998 to
$8.1 million at September 30, 1999. This increase primarily results from the
combined $7.1 million conversion of the Vertex convertible secured debt, the
issuance of Preferred stock in July 1999 (see note 7 "Vertex Note Conversion and
Equity Financing")and $136,000 from the sale of common stock to employees and
the issuance of warrants for cash, but was offset by the [$1.0 million] net loss
for the nine month period ending September 30, 1999.
At September 30, 1999, we had $3.1 million in cash and cash equivalents and
$735,000 of working capital. We maintain a revolving credit line with a bank
that expires on September 30, 2000. The maximum amount that can be borrowed
under the revolving credit line is $5.0 million. As of September 30, 1999,
$900,000 was allocated to a standby letter of credit to support our European
banking line and $2.4 million of borrowings were outstanding. Borrowings and the
standby letter of credit under the revolving credit line are limited to 80% of
eligible accounts receivable and are secured by a lien on substantially all of
our assets. These borrowings bear interest at the bank's base lending rate,
currently at 8.25%, plus 2.0%. The loan agreement contains financial covenants,
commencing with the quarter ending September 30, 1999, which prohibits cash
dividends and mergers and acquisitions without the bank's prior approval.
Certain of these covenants, which the Company was not in compliance with as of
September 30, 1999, have been waived through such date.
We entered into an interest only, variable rate note of $2.5 million with a bank
that matured March 1, 1998. On March 19, 1998, this note was converted to a
variable rate, term loan with principal and interest payable over 36 months. The
term loan covenants and interest rate were amended in conjunction with the new
line of credit agreement. The new financial covenants commence with the quarter
ending September 30, 1999. Borrowings under the loan are secured by a lien on
all assets acquired using the proceeds of the loan, which have been used for the
acquisition of equipment and leasehold improvements. The loan bears interest at
the bank's base lending rate, currently at 8.25%, plus 2.5%. The loan contains
certain financial covenants and also prohibits cash dividends and mergers and
acquisitions without the bank's prior approval. Certain of these covenants,
which the Company was not in compliance with as of September 30, 1999, have been
waived through such date.
*We believe with the additional $2.5 million cash from the Preferred Series A
equity offering and our bank line of credit, that our current cash, cash
equivalents, our lines of credit, and the net cash provided by operations, will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for 1999. At September 30, 1999, our commitments for capital
expenditures were not material. *If cash provided by operations is insufficient
to satisfy our liquidity requirements, we will seek additional debt or equity
financing. Such financing may not be available on terms acceptable to us, if at
all. The sale of additional equity or convertible debt securities could result
in dilution to our shareholders. *A portion of our cash may be used to acquire
or invest in complementary businesses or products or to obtain the right to use
complementary technologies. From time to time, we evaluate potential
acquisitions of such businesses, products and technologies.
We had our second consecutive profitable quarter in the period ending September
30, 1999, however, in the quarter ending March 31, 1999 and for the years 1997
and 1998 we experienced net losses and negative cash flows. We are subject to
fluctuations in operating results and therefore, if the company were to
experience additional losses in future periods there may be a need for
additional financing.
The actual cash resources required to successfully implement our business plan
in year 1999 will depend upon numerous factors, including but not limited to
those described in our December 31, 1998 10-KSB on file with the SEC and the
following additional Risk Factors.
RISK FACTORS
This Form 10-QSB contains forward-looking statements that involve risks and
uncertainties, including, but not limited to, those set forth below, that could
cause actual results to differ materially from those in the forward-looking
statements. The matters set forth below should be carefully considered when
evaluating our business and prospects.
WE HAVE LIMITED WORKING CAPITAL. We incurred a significant reduction in working
capital in 1998, however we have been able to restore a positive working capital
position in 1999, due to the additional equity funding. To date, we have not
achieved business volume sufficient to restore year to date profitability and a
year to date positive cash flow. We operated at a net loss of $20 million in
1998 and for the nine month period ending September 30, 1999 have incurred an
additional net loss of $1.0 million. Our available cash and credit facilities
may not be sufficient to fund our
16
<PAGE> 17
operations and successfully implement our business plan, part of which consists
of pursuing potential strategic relationships, acquisitions of companies,
products and technologies. Also, the Soft Mountain shareholders have demanded
that we repurchase for approximately $1.1 million the 246,586 shares of our
common stock issued to them in connection with our purchase of Soft Mountain
shares as a result of our inability to register their shares by December 31,
1998. See note 8 "Vertex Note Conversion and Equity Financing".
OUR COMMON STOCK MAY BE DELISTED FROM NASDAQ. To maintain our listing on the
Nasdaq SmallCap Market, there are several requirements applicable to all issuers
listed there, including a minimum bid price of one dollar per share and net
tangible assets of $2.0 million. We might not meet these or other continued
listing requirements in the future. If our common stock were delisted, we may
not be able to satisfy the higher requirements for relisting on either the
Nasdaq National or Nasdaq SmallCap Market. If we were delisted, trading our
stock would be more difficult.
OUR EXISTING DEBT BURDEN IS SUBSTANTIAL. At September 30, 1999, we had the
following outstanding borrowings:
(1) $2.4 million under a bank revolving loan, which expires on September
30, 2000
(2) $1.5 million under a bank term loan, which expires on March 18, 2001
The Company was not in compliance with certain covenants associated with these
loans as of September 30, 1999. The bank has waived this noncompliance through
this date.
STOCK OWNERSHIP HAS BECOME MORE CONCENTRATED AND SUBJECT TO DILUTION. As a
result of the Vertex note conversion and equity financing in July 1999,
ownership of our equity has become more concentrated according to Vertex filings
with the SEC. Based on these filings and assuming 10,151,277 shares outstanding,
Vertex would own approximately 21% of our common stock if it converted all of
its Preferred Stock and exercised all of its warrants. Moreover, affiliates of
Vertex own additional shares of common stock, Preferred Stock and warrants.
Additionally, the Company has registered 3,175,586 shares and will register an
additional 2,663,505 shares of common stock that may be issuable in connection
with the conversion of Preferred Stock or the exercise of warrants issued in
connection with such financing. The issuance of such shares could result in the
dilution of other shareholders, and the sale of such shares could depress the
market price of our stock.
OUR BUSINESS MAY BE HARMED BY YEAR 2000 PROBLEMS. We and our customers and
suppliers are aware and concerned about the risks associated with Year 2000
computer issues. If our systems do not recognize the correct date when the year
changes to 2000, there could be a material adverse effect on our operations. We
are at risk from both internal and external areas. We have categorized our risk
into the following categories:
(1) internal systems required to operate our business (e.g. operational,
financial, product development, safety and environmental controls)
(2) external supplier systems that are necessary to support our business
requirements (e.g. raw materials, supplies, shipping and delivery
systems, banking, payroll and government systems) and
(3) product warranty exposure with our customer base.
We are currently evaluating our exposure in all these areas. We have been
reviewing our facility, financial and operating systems to identify and assess
the requirements to bring hardware systems and software applications to Year
2000 compliance. We expect to conclude the upgrades to certain non-compliant
hardware and software systems by November 30,1999. We are in the process of
reviewing our need for alternative remediation plans in the event Year 2000
issues can not be adequately corrected. To date we have not found a need to
define any remediation plans, however we will define alternative plans if and
when we discover systems that can not be made Year 2000 compliant. If
implementation of upgrade or replacement systems is delayed or if significant
new non-compliance issues are discovered, our operations could be materially
adversely affected.
We have and will continue to make certain investments in software applications
and systems to ensure that we are Year 2000 compliant with respect to our
internal systems. In particular, our purchase of $9 million of property and
equipment during 1997 and 1998 included substantial investments in management
and information systems designed to be Year 2000 compliant.
We have contracted with an outside independent consulting firm to provide
internal Year 2000 equipment testing and consulting services to assist us in the
process of defining and implementing a Year 2000 compliance project.
17
<PAGE> 18
This compliance project includes the following phases:
<TABLE>
<CAPTION>
EXPECTED
COMPLETION
NAME OF PHASE: DESCRIPTION: STATUS: DATE
- ------------- ------------ ------- ----------
<S> <C> <C> <C>
Awareness and Educate the company on the Year 2000 project, the Completed --
Assessment Phase potential problems associated with this date
issue. Inventory our systems and products that require
compliance testing.
Testing and Test our systems and products and identify the Completed --
Validation Phase non-compliant areas, develop remediation plans, map
the conversion process to correct non-compliant areas
and validate the changes that need to be made to
correct non-compliant areas.
Implementation and Convert non-compliant areas with compliant products Began November
Certification Phase (hardware or software), verify that all intended August 1999 1999
changes have been made successfully and that all
planned Year 2000 compliance changes have been made.
Maintenance Phase This phase puts processes and procedures in place Begins December
to minimize the likelihood that Year 2000 compliance November 1999 1999
problems will be reintroduced into the compliant
systems and products.
</TABLE>
STATUS:
Awareness and Assessment Phase: We have written and published an awareness
statement to educate our employees, vendors and customers about the Year 2000
issues and potential problems associated with the Year 2000 rollover problem and
what effect this will have on our company and customers. We have published a
statement about our products, testing procedures used and their Y2k compliance.
We have published these statements internally to our employees and management
and will be distributing these statements via our web site "versant.com" and by
mail to certain vendors and customers by the end of July 1999. We have
identified all internal systems (products and software) that need to be tested
for Year 2000 compliance.
Testing and Validation Phase: We have tested our personal computers and servers
used by our information management systems, engineering development teams and
employees to complete their daily work assignments. The results were 3 personal
computers (one 486 and two Pentiums), and two servers (both Pentiums) failed our
Year 2000 test. We intend to replace both servers and the 486 system with
existing Y2k compliant inventory, and upgrade the remaining two Pentiums with
bios upgrades if possible or replace. In the process of testing our internal
business software programs we have determined that certain operating systems
(Win95, Win98, NT, Novell) and certain financial programs need to be upgraded
with Y2k patches to be Y2k compliant. We have budgeted $50,000 for the upgrade
process (software and labor) and plan to complete the upgrade process by
November 1999. We have requested validation with respect to Year 2000 compliance
regarding external providers for phone service, security service, utility
service, internet service and air conditioning service and received assurances
by a response letter or by reviewing the respective company's web site Y2k
statement that each provider is or will be Y2k compliant (punctuated with the
normal protective legalize) by the December 31, 1999 deadline. To date we have
not found any reason to suspect that these outside providers of services are not
or will not be Year 2000 compliant by December 31, 1999. We will develop
remediation plans to correct non-compliant systems as soon as we discover a need
to do so.
In addition to the internal testing, evaluation and remediation project, we have
requested validation with respect to Year 2000 compliance from our suppliers and
providers of third-party technology that may be integrated with our products to
determine if the suppliers operations', products and services are Year 2000
compliant. We sent these questionnaires to our third party providers and key
suppliers at the end of June 1999. We have concluded our review and received
assurances by a response letter or by reviewing the respective company's web
site Y2k statement that each company is
18
<PAGE> 19
or will be Y2k compliant (punctuated with the normal protective legalize) by the
December 31, 1999 deadline. To date we have not found any reason to suspect that
these outside suppliers and providers of third-party technology are not or will
not be Year 2000 compliant by December 31, 1999. We will develop remediation
plans to correct non-compliant systems as soon as we discover a need to do so.
Despite the foregoing measures, there can be no assurance that Year 2000
problems will not occur and the consequences of any such problems may be
material to the operation of the Company and its financial results or prospects.
Where practical, we will take the necessary actions to reduce our exposure to
suppliers that are not Year 2000 compliant by finding alternative suppliers.
However, there may be critical suppliers that cannot be substituted and this
could have a material adverse effect on our operations.
We believe our products are Year 2000 compliant. However, not every customer
situation can be anticipated, especially in areas that involve third party
products. Extensive testing has been performed on our products and additional
testing will continue as we become aware of our customer's Year 2000 needs and
issues. We may see an increase in customer demands for warranty service. This
may create additional service costs that can not be recovered. In addition, if
our products are not Year 2000 compliant, we could face litigation regarding
Year 2000 compliance issues.
The process to insure our systems and our supplier systems are Year 2000
compliant is expected to be significantly completed by November 30, 1999, with
testing to be done through the remainder of 1999. In addition, we could face
reduced demand for our products through 1999 if customers focus on purchasing
solutions to their Year 2000 problems rather than purchasing our products, which
are not designed to solve Year 2000 problems.
Customer's purchasing plans could be affected by the Year 2000 problem if they
need to expend significant resources to correct their existing systems. This
situation may result in reduced funds available to implement solutions based
upon our products. In addition, some customers may defer the license of our
products until after the Year 2000 while they complete remediation and testing
of their current systems to ensure Year 2000 compliance. A decrease in demand
for our products due to customers' Year 2000 issues would seriously harm our
business and results of operations.
Please refer to our December 31, 1998 10-KSB, on file with the SEC, section
labeled "Risk Factors" for a complete description of the risk factors facing our
company.
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<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its present and former officers and directors were
named as defendants in four class action lawsuits filed in the United States
District Court for the Northern District of California, filed on January 26,
1998, February 5, 1998, March 11, 1998 and March 18, 1998, respectively. On June
19, 1998, a Consolidated Amended Complaint was filed in the above mentioned
court, by the lead Plaintiff named by the court. The amended complaint alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and
Securities and Exchange Commission Rule 10b-5 promulgated under the Securities
Exchange Act, in connection with public statements about the Company's expected
financial performance. The complaint seeks an unspecified amount of damages. The
Company vigorously denies the plaintiffs' claims and has moved to dismiss the
allegations. The Plaintiff has filed a response to the Company's motion to
dismiss and the Company has filed an opposition to Plaintiff's response. The
motion to dismiss was submitted to the court for consideration on November 13,
1998 and the court has not yet issued a decision. Securities litigation can be
expensive to defend, consume significant amounts of management time and result
in adverse judgments or settlements that could have a material adverse effect on
the Company's results of operations and financial condition.
The selling shareholders of the Soft Mountain shares (see Note 11 of the
footnotes to the financial statements, in the annual 10-KSB for December 31,
1998) have demanded that the Company repurchase for approximately $1.1 million
the 245,586 shares of the Company's common stock issued to them in conjunction
with the Company's purchase of all of Soft Mountain's shares. The demand alleges
that the Company has not registered the shares issued in the transaction in a
timely manner. The Company disputes the right of such shareholders to receive
such payment, however any potential settlement could result in the payment of
cash or the issuance of additional Versant stock. Settlement discussions are
ongoing. Arbitration or litigation may result if a settlement cannot be reached.
On April 9, 1999, the Company filed a Form S-3 registration statement for shares
of the Company's common stock issued to the Soft Mountain shareholders and
others. *The registration statement became effective May 14, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 12, 1999, the Company closed the issuance of shares of a newly
designated Series A Preferred Stock ("Series A Stock"). A total of 1,489,799
shares of Series A Stock were issued, with each share of Series A Stock
initially convertible into two shares of the Company's common stock Each share
of Series A Stock was sold at a price of $4.26 per share. The Company also
issued warrants to purchase a total of 1,489,799 shares of the Company's common
stock at an exercise price of $2.13 per share as part of the transaction. The
Series A Stock has a participating liquidation preference over the Company's
common stock initially equal to 150% of the full amount paid for the Series A
Stock, which preference increases by an additional 50% per year over each of the
next two years, so long as the Series A Stock is outstanding. The Series A Stock
automatically converts into common stock if the Company's common stock price
exceeds $12.00 per share for 45 consecutive business days. The holders of Series
A Stock will generally vote with the holders of common stock; provided that the
Series A Stock is only entitled to a number of votes equal to 50% of the number
of shares of common stock into which the Series A Stock is convertible. The
holders of Series A Stock were also provided with certain voting protective
provisions.
Neither the Series A Stock nor the warrants have been registered under the
Securities Act of 1933, and may not be offered or sold in the United States
absent registration or an exemption from applicable registration requirements.
Investors in the financing were provided with certain registration rights
relating to the shares of Series A Stock and warrants purchased by them. Each
investor also agreed not to purchase more than 100,000 additional shares in the
Company without the Company's approval so long as such investor holds more than
5% of the Company's outstanding securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
20
<PAGE> 21
On October 21, 1999, the board of directors added Mr. Hank Delevati to the
board. Mr. Delevati has been the Senior Vice President of Information
Technology and CIO with Aspect Communications, a provider of
telecommunications equipment and application software since August 1999.
Prior to Aspect Mr. Delevati was the CIO of Quantum Corporation from 1995
to 1999, CIO of Borland Corporation from 1994 to 1995 and the CIO of
Logitech from 1993 to 1994, Between 1987 and 1993 Mr. Delevati worked with
Sun Microsystems as their Director -- Applications Development & Global
Information Resources. Mr. Delevati received his Bachelor of Science in
Computer Sciences from Arizona State University. Mr. Delevati is also a
director of Insite Objects.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a)
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title
- ----------- -------------
<S> <C>
10.36 Modification to Loan & Security Agreement dated June 18, 1999
incorporated by reference to the Company's previous quarterly
report on Form 10-Q filed August 2, 1999.
10.01 Preferred Stock and Warrant Purchase Agreement entered into as of
June 28, 1999 incorporated by reference to the Company's current
report on Form 8-K filed July 12, 1999.
27.01 Financial Data Schedule
</TABLE>
(b) On July 12, 1999 the Company filed a report on Form 8-K in
connection with the issuance of the Preferred Stock.
(c) On July 19, 1999 the Company filed a report on Form 8-K in
connection with the delisting of its common stock from the
Nasdaq National Market.
21
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSANT CORPORATION
Date: November 5, 1999 /s/ Gary Rhea
----------------------------------------
Gary Rhea
Vice President Finance and Administration.
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal
Financial Officer)
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
27.01 -- Financial Data Schedule
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF OPERATIONS AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,050
<SECURITIES> 0
<RECEIVABLES> 7,904
<ALLOWANCES> 420
<INVENTORY> 0
<CURRENT-ASSETS> 11,400
<PP&E> 13,632
<DEPRECIATION> 7,693
<TOTAL-ASSETS> 19,360
<CURRENT-LIABILITIES> 10,665
<BONDS> 0
0
0
<COMMON> 47,265
<OTHER-SE> (39,214)
<TOTAL-LIABILITY-AND-EQUITY> 19,360
<SALES> 19,959
<TOTAL-REVENUES> 19,959
<CGS> 3,866
<TOTAL-COSTS> 3,866
<OTHER-EXPENSES> 15,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,187)
<INCOME-PRETAX> (964)
<INCOME-TAX> 32
<INCOME-CONTINUING> (996)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (996)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
