UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-KSB
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999
| | Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to .
Commission file number: 0-28540
VERSANT CORPORATION
(Name of small business issuer in its charter)
California 94-3079392
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6539 Dumbarton Circle, Fremont, California 94555
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (510) 789-1500
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No__
---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of our knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the year ended December 31, 1999 were
$25,900,000.
As of February 29, 2000, there were outstanding 10,990,869 shares of the
issuer's common stock, no par value per share. As of that date, the aggregate
market value of the shares of common stock held by non-affiliates of the issuer
(based on the closing price of $13.687 for the issuer's common stock on the
Nasdaq National Market on February 29, 2000) was approximately $126,385,156.
This excludes 1,756,913 shares of common stock held by directors, officers and
certain stockholders of the issuer. Exclusion of shares held by any person
should not be construed to indicate that such person possesses power, direct or
indirect, to direct or cause the direction of the management or policies of the
issuer, or that such person is controlled by or is under common control with the
issuer.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's definitive proxy statement for the issuer's 2000
annual meeting of shareholders to be filed with the Securities and Exchange
Commission by April 30, 2000 are incorporated by reference in Part III of this
Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes __ No X
--
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VERSANT CORPORATION
ANNUAL REPORT ON
FORM 10-KSB
For the Year Ended December 31, 1999
TABLE OF CONTENTS
Form 10-KSB
Item No. Name of Item Page
PART I
Item 1 Description of Business 1
Item 2 Description of Property 13
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 15
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 7A Quantitative and Qualitative Disclosures About Market Risk 30
Item 8 Financial Statements 30
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 30
PART III
Item 10 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 31
Item 11 Executive Compensation 31
Item 12 Security Ownership of Certain Beneficial Owners and Management 31
Item 13 Certain Relationships and Related Transactions 31
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
Signatures 32
Index to Consolidated Financial Statements and Financial Statement Schedule F-1
Versant(R) is a registered trademark of our company. This Form 10-KSB
also includes trade names and trademarks of other companies.
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PART I
Item 1. Description of Business
This Form 10-KSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. These forward-looking statements involve a number of
risks and uncertainties which are described throughout this Form 10-KSB,
including under "Revenues" and "Risk Factors" in Item 6 of this Form 10-KSB. The
actual results that we achieve may differ materially from any forward-looking
statements due to such risks and uncertainties. We have identified, using a
preceding asterisk, various sentences within this Form 10-KSB which contain such
forward-looking statements, and words such as "believes," "anticipates,"
"expects," "intends" and similar expressions are intended to identify
forward-looking statements, but these are not the exclusive means of identifying
such statements. In addition, the section labeled "Risk Factors" in Item 6 of
this Form 10-KSB, which does not include asterisks for improved readability,
consists primarily of forward-looking statements and associated risks. We
undertake no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
Readers are urged to carefully review and consider the various disclosures made
by us in this report and in our other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and
factors that may affect our business.
Overview
Our company designs, develops, markets and supports object management
systems including database management systems, data replication and middle tier
persistence for distributed computing environments, including the growing
e-business marketplace.
Our core product is the Versant Object Database Management System (ODBMS), a
highly scaleable database management system that combines native support for
object-oriented languages with high performance database functionality and a
client-server architecture. The Versant ODBMS enables users to store, manage and
distribute information that we believe often cannot be supported effectively by
traditional database technologies, including:
(1) abstract data, such as graphics, images, video, audio and unstructured
text;
(2) dynamic, highly interrelated data, such as network management data,
advanced financial instruments; and
(3) distributed, rapidly changing content in Internet-based applications.
The core ODBMS technology is also part of Versant's application server
integration product suite called, Versant Enterprise Container (VEC). We offer
Enterprise Java Bean (EJB) compliant application server integration for both IBM
WebSphere and BEA/WebLogic. We also provide peripheral products, including
object-oriented programming language interfaces, database query tools,
application development tools, legacy database access tools, Internet-based
integration tools and multimedia management tools. We are in the process of
bundling these technology components and products into the Versant Developer
Suite and the Versant enJin. Versant Developer Suite is the next generation core
ODBMS product and Versant enJin is the next generation application server
integration product. Both product suites are expected to be available as
packaged bundles by the second quarter of 2000.
In addition, we offer a variety of services, including training, consulting
and technical support, to assist users in developing and deploying applications
based on the Versant ODBMS.
Our customers include AT&T, Alcatel Network Systems, Banque Nationale de
Paris, British Airways, British Telecommunications plc, Chase Manhattan Bank,
The Chicago Stock Exchange, Dresdner Kleinwort Benson, EDS, Ericsson Radio
Systems, France Telecom, GE Harris, HNC Software, Lucent, MCI WorldCom, Sabre,
Northern Telecom, Siemens, Sprint, Qantas, Texaco and TRW. We are a leading
provider of object management systems to the telecommunications industry, where
our products are used in strategic distributed applications such as network
modeling and management, fault diagnosis, service activation and assurance and
customer billing. We have also experienced customer acceptance in other vertical
markets, including the financial services, transportation, defense, health care
and energy markets. These markets are similar to the telecommunications market
in their increasing need for high performance support for distributed
applications involving abstract data types and dynamic, highly interrelated
information.
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We were incorporated in California in August 1988 as Object Sciences
Corporation. Our principal executive offices are located at 6539 Dumbarton
Circle, Fremont, California 94555, and our telephone number is (510) 789-1500.
Background
Organizations are under increasing pressure to manage and adapt to the
forces of accelerating change and growing complexity. The combined demands of
global competition, deregulation and organizational restructuring, as well as
rapid changes in products and markets and a proliferation of new technologies,
increasingly complicate business operations. The rise of the Internet and
related technologies has enabled companies to greatly expand their geographical
reach, streamline business processes cost effectively across its supply chain
and provided new sources of revenue streams. The benefits of the Internet have
also created additional requirements for information infrastructures to scale to
a level not seen before. Management systems must accommodate thousands of
concurrent users, millions of transactions per day and an architecture made even
more distributed and complex. These pressures fall heavily on enterprise
information systems and emerging service providers such as portals,
infomediaries and mobile commerce providers, which must model this complexity,
support increasingly distributed operations and manage new types of information
that are more diverse, interrelated and dynamic.
In attempting to respond to these pressures, traditional information
technologies are being stretched to deliver solutions for which they were
neither designed nor intended. This is particularly true in the areas of
software programming, Internet middleware and database management, where many
existing technology paradigms date back to the 1970s or earlier. The "structured
programming" approach, which still dominates most software development, requires
reduction of a business problem to a series of segmented procedures that are
implemented line by line to build large, monolithic software programs. This
approach can be slow and error-prone, and often produces software programs that
are costly to maintain and difficult to change.
A newer approach to software development, object-oriented programming,
responds to many of these limitations. Object-oriented programming languages,
such as C++ and Java, enable software developers to realistically model the
complexities of large scale, dynamic systems, and to develop, maintain and
evolve complex programs more quickly and at a higher level of quality than is
often possible using structured programming. In addition, Java allows software
developers to create applications once that will run on any computing platform,
unlike most other programming languages, which require developers to modify an
application every time it is ported to a different computing platform. As a
result, we believe that object-oriented programming languages, especially Java,
are increasingly being used by software developers.
While object-oriented technology can address many software development
problems, it places new demands on existing database management systems, most of
which were designed to operate with traditional programming methodologies and
simpler types of data in centralized environments. The hierarchical and
relational database management systems now prevalent were developed at a time
when data processing operations were highly structured and performed on
centralized mainframe platforms or, in the case of relational database
management systems, two-tier client/server applications. These systems perform
well with simple types of data (such as text and numbers) and static
relationships. However, businesses are increasingly required to deploy database
management systems that can effectively manage the problems and conditions
listed below:
o Abstract Data Types. Graphics, images, video, audio and unstructured text,
often combined in one application, are proliferating in business and
Internet-based applications.
o Complex Data Relationships. Telecommunications networks, Internet-based
applications, financial instruments, health care systems, customer support
systems, airline reservation systems and logistics management often involve
complex relationships among thousands of rapidly changing items.
o Constant Change. Business rules, data relationships, technology and
information are constantly changing, requiring information systems and
applications that can be quickly deployed and flexibly evolved to adapt to
changes while maintaining overall system quality and data integrity and
while keeping the system in service.
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o Highly Distributed Data. Complex, interrelated, constantly changing data may
be created in or distributed to dozens or hundreds of locations around the
world, and must be carefully managed to maintain integrity yet be available
on demand to many users on different platforms.
The growth of the Internet and the World Wide Web as mainstream computing
and communication platforms compounds these challenges. The Internet
incorporates new types and combinations of dynamic, abstract data, and involves
a complex array of relationships among users, service and content providers,
data sources and information repackagers and resellers. This computing
environment is inherently distributed and dynamic and is evolving at a rapid
pace. The use of the Internet for transactional e-business applications, and the
proliferation of corporate Intranets, business-to-business (B2B) and
business-to-consumer (B2C) companies, are accelerating this complexity, further
increasing demand for new software and database technologies. Companies need to
integrate Internet and e-business applications with corporate databases, but the
abstract multimedia information and complex, changing data relationships
prevalent in these applications are not easily accommodated by hierarchical or
relational databases.
Information Systems (IS) architectures have evolved to support the
development of e-business applications through the deployment of application
servers. Leading application server vendors include BEA/WebLogic and IBM
WebSphere. These and many other vendors provide a "middle-tier" solution to
manage distributed e-business applications over the Internet while allowing
enterprises to maintain and leverage their line-of-business databases on the
"back-end". The growing popularity of the application server is supported by the
industry analyst firm, IDC's, 1999 Worldwide Market for Application Servers:
Setting the Course for 2000 (published December 1999), which predicts that by
the year 2003, worldwide sales of application servers will reach $2.36 billion.
The line-of-business database is typically based on relational database
management systems (RDBMSs).
RDBMSs were developed in the 1970s to address the inflexibility of
hierarchical databases. They were used initially to perform ad hoc queries and
later for online transaction processing and decision support systems. An RDBMS
stores data in a series of two-dimensional tables and defines relationships
between data by connecting rows and columns and linking multiple tables.
Indexing multiple tables and then "joining" them to create a different view of
the data involves complex queries. RDBMSs are adept at handling simple types of
information, such as alphanumeric data, and managing static relationships, such
as that between a part number and an invoice. They are less effective in
managing more abstract data types, such as graphics, video and audio, which is
stored in RDBMSs as isolated binary large objects that do not support analysis,
manipulation or relationships to other data. In addition, RDBMSs are relatively
inefficient when used to manage complex relationships because of the inherent
burden of indexing and joining multiple two-dimensional tables. This performance
burden can significantly lengthen response times and is compounded when users
seek to maintain data on more than one server in a distributed environment
because data must be transmitted to a central server where these joins can be
performed. The burden is increased as applications become more complex and
information more interrelated.
Relational database vendors have attempted to address some of the
shortcomings of RDBMSs by "extending" their support for abstract data types with
object-relational and pure object-oriented approaches, and the use of robust
middleware applications that enable organizations to connect object-oriented
applications to RDBMSs. The use of object-relational and middleware approaches
can improve relational performance for many enterprise customers, but we believe
that the performance of object-relational systems or RDBMSs augmented by
middleware is limited by the two-dimensional kernel architecture of RDBMSs.
For the foregoing reasons, we believe today's business organizations need to
manage abstract data types as well as complex dynamic relationships in a vastly
more distributed environment and that this need is often not effectively
addressed by hierarchical, relational and object-relational database management
systems.
The Versant Solution
Versant's core product, ODBMS and the Versant Enterprise Container (VEC)
combine native support for object-oriented languages with high performance
database functionality and a client-server architecture that supports two-tier
to n-tier applications. As a standalone database, the Versant ODBMS is designed
to meet commercial users' requirements for high performance, scalability,
reliability and compatibility with heterogeneous computing platforms and legacy
information systems. Incorporated into Versant's application server integration
product (now VEC, soon to be bundled and renamed, Versant enJin), the ODBMS
provides several value-added functions to the application server environment.
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For those customers needing to store and maintain the integrity of data in the
middle-tier, Versant's core technology serves as a persistent cache. This means
that customers developing new e-business applications can take advantage of
native object-based models, the integrity of a robust and highly reliable
"persistent cache" and the streamlining of access to and from the relational
database on the back-end. This last feature alone can increase performance by
more than 10 times. In addition Versant benefits include:
o Management of Abstract Data Types. Versant allows users to store and manage a
wide range of abstract information, such as images, video, audio and
unstructured text, as well as traditional types of alphanumeric data. Nearly any
kind of information that can be digitized can be stored as an object in the
Versant ODBMS, while maintaining the application-defined behavior and
relationships of the objects.
o Language-Independent Support for Object-Oriented Programming. The Versant
solution provides native support for the leading object-oriented software
development languages--C++ and Java. This support facilitates rapid and flexible
development, maintenance and evolution of complex, dynamic applications that
closely model real-world systems and processes. Objects developed in these
languages are directly stored in the Versant ODBMS. In addition, Versant is
language-independent, allowing objects written in one object-oriented language
to interoperate with objects written in another object-oriented language.
Moreover, the Versant solution supports Java, an object-oriented language that
allows the development of applications that will run on any computing platform
without modification.
o High Performance. The Versant object-based architecture provides direct access
(navigation) to stored objects. Its balanced client-server architecture enhances
performance by efficiently distributing processing burdens between the client
and the server to leverage the processing power of networked computers. As a
result, certain customers running complex applications involving highly
interrelated data on Versant have reported a ten-to-hundred-fold improvement in
performance compared to RDBMSs running similar applications.
o Highly Scaleable Support for Distributed Computing. The Versant object-based
architecture is designed to support the transparent integration of up to 65,000
separate databases in one network, distributed over a range of hardware and
software platforms. Through object-level operations, Web browser support and
other design features, Versant can be scaled from small workgroup operations to
thousands of users over wide area networks or the Internet.
o Reliability, Availability and Serviceability. The Versant ODBMS offers a
number of features designed to permit continuous operation, including features
providing online backup and recovery and online modification of the database
system, as well as system utilities that can operate while the system is
running. These features, together with replication and disk mirroring provided
by our Fault Tolerant Server, support operations 24 hours per day, 365 days per
year in environments such as telecommunications network, commercial banking and
airline reservation systems, where it is critical that the database be
continuously available.
o Support for Three-Tier Architectures. Traditional two-tier architectures are
adequate for closely coupled client-server environments but become unwieldy in
large, distributed systems. The Versant solution supports three-tier
architectures, in which application logic resides as a middle layer between
clients and data stores. This architecture insulates data from constant change,
allows an end-user or application to locate data across multiple databases and
improves the productivity and quality of application development and
maintenance.
o Support for Component Architectures. The Versant Enterprise Container (VEC)
integrates with leading Java application servers including BEA WebLogic and IBM
WebSphere application servers. The application servers enable users to build and
deploy Enterprise Java Bean (EJB)- based applications to the VEC, thereby
gaining the inherent productivity and performance advantages of the Versant
ODBMS.
o Integration with Users' Existing Information Systems. The Versant solution
operates on a wide range of server platforms, including industry-leading UNIX
platforms from Sun Microsystems, Hewlett-Packard, IBM, Digital Equipment
Corporation and Silicon Graphics, Linux platforms from industry leader, Red Hat,
as well as Microsoft's Windows 95, Windows 98, and Windows NT platforms. Objects
can be readily accessed and stored by any combination of these platforms in a
heterogeneous network. In addition, Versant-based applications can interoperate
with information stored in relational database management systems, enabling such
applications to complement RDBMS
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strengths in structured applications. These compatibilities allow users to
protect their existing investments in databases and information systems while
migrating newer systems to object-oriented platforms.
o Persistence. Traditionally, persistence for object-oriented applications
required explicit application code in some object programming language. The
emergence of EJB-based application servers offers an alternative to explicit
programming, where application components execute in containers that provide
object persistence services. The Versant Enterprise Container supports EJB's
that interface to the Versant ODBMS via a Java database interface, enabling
customers to utilize the Versant ODBMS as a persistence solution.
Company Strategy
Versant's objective is to be the leading provider of Internet middleware for
object management of e-business applications. Key elements of our strategy to
achieve this objective include the following:
o Extend Technology Leadership. A significant component of our strategy is to
leverage our knowledge and expertise in object database management systems for
e-business applications. We believe that our product architecture includes a
number of important technological advances and that this technological
leadership is essential to our continued ability to compete effectively. In
1999, we released products that enable organizations to:
(1) utilize the Versant ODBMS in conjunction with the IBM WebSphere and BEA
WebLogic application server family (2) extended asynchronous replication
solution that allows data to be replicated from one Versant database to another
(3) improved Java Versant Interface to enable Java objects to persist in Versant
ODBMS (4) made available an early developer's release for the Versant XML
Toolkit providing import and export of Extended Markup Language (XML) data into
and out of the Versant ODBMS.
*We intend to extend our leadership position by continuing to invest in
internal research and development, establishing strategic relationships with
leading providers of complementary technologies and by integrating the Versant
ODBMS with products offered by third parties. We note that our technological
development efforts are subject to the risks typically associated with such
efforts, including development delays and the technological challenges of
creating new functionality and integrating third-party products into Versant's
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--We depend on successful technology
development."
o Leverage Strength in Telecommunications to Other Vertical Markets. We are a
leading provider of object database management solutions to the
telecommunications market, where our products are used in such strategic,
distributed applications as network modeling and management, fault diagnosis,
fraud prevention, service activation and assurance and customer billing. We
believe that our experience and success in this demanding market positions us to
address other vertical markets such as financial services, transportation,
defense, health care and energy. These markets are similar to the
telecommunications market in their increasing reliance on large networks and
need for high performance support for abstract data types and for distributed,
complex applications involving dynamic, highly interrelated information. In
1999, we increased our focus on the financial services market and conducted
several seminars worldwide to expand awareness of us and our products in this
market. *We intend to continue to derive revenues from telecommunications and
financial services in 2000, though we will seek additional opportunities outside
these markets as well. Our success in the telecommunications, financial services
and other markets is dependent, in part, on our ability to compete with
alternative technology providers and the extent to which our customers and
potential customers believe we have the expertise necessary to provide effective
solutions in these markets. If these conditions, among others, are not
satisfied, we may not be successful in generating additional opportunities in
these markets. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations --Risk Factors--We rely on telecommunications and
financial services markets."
o Capitalize on the e-business Market Opportunity. *We believe that the
increasing development of new e-business applications for both large-scale
enterprises and for Internet startups such as portals, infomediaries and b2b
vendors will significantly expand the market opportunity for our object
technologies. Internet-based computing environments and applications are highly
distributed and are increasingly becoming more complex, requiring highly
scaleable, high performance database systems as their infrastructure. In
addition, e-business applications increasingly
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incorporate abstract data types and are increasingly being addressed by
object-oriented programming languages such as Java. As a result, we believe that
our object-based component architecture position us to capitalize upon the
Internet-based market. Certain of our customers, including iVendor, StellarX,
Covia (formerly Glyphica), CyberRoad (formerly Calvex), Future State Technology,
France Telecom spin-off NetCentrex, Factiva, AVT Technologies, Syncom,
Platform7, Software.com, Whiplash and France Telecom's New Development
Laboratory, are using Versant technology to enhance the performance of
Internet-based infrastructures and applications. *We intend to continue focusing
on the Internet-based market opportunity and working with partners to improve
the performance of Internet-based infrastructures. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risk Factors--We
rely on telecommunications and financial services markets."
o Integrate with Component Middle-tier Servers. Today, Versant partners with the
two leading application server vendors, IBM WebSphere and BEA/WebLogic. We
intend to continue to integrate with leading providers of component-based
servers offering persistence services. Existing standards for EJB solutions and
emerging standards for common object request broker architecture (CORBA),
solutions provide an important opportunity for Versant to expand into new
markets.
o Expand Distribution Channels. *We intend to expand our indirect distribution
channels by recruiting additional value-added resellers, distributors and other
resellers. *As familiarity with object-oriented technology and awareness of our
products increase, we believe that we will be able to increase our use of
indirect sales channels to address a broader market and to capitalize on
resellers' integration capabilities. In addition, we believe that international
markets present attractive opportunities, particularly as telecommunications and
other industries face increasing change and competitive pressures worldwide. *We
intend to continue to expand our international distribution network to
capitalize on these opportunities, particularly through Versant Europe, our
European subsidiary. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--We depend on our
international operations."
o Enable Customers to Implement a Complete Solution. Versant is working to
bundle its technologies and products into complete solutions for our customers.
By second quarter 2000, Versant expects to have available the Versant Developer
Suite and the Versant enJin suite of products. These product suites are intended
to enable customers to more quickly and easily develop and implement new
applications. Versant also continues to work with its application server
partners, IBM and BEA to further product integration between the two vendors.
*We intend to expand the breadth of our product offerings through internal
development efforts and through marketing, licensing and other relationships
with providers of complementary technologies and other market participants. *We
believe that by providing our customers with a more complete solution, we can
facilitate their adoption of object-oriented technology, accelerate the
development of applications in a component framework, and expand the use and
value of our products. However, Versant product offerings may not be
commercially accepted by our customers and are subject to potential development
delays due to the technological challenges of creating new product offerings,
and competing solutions may limit the market opportunity for Versant product
offerings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--We depend on successful technology
development."
o Increase Penetration of Current Customer Base. We seek to generate
incremental, recurring revenue from our installed base of customers. In 1999, we
significantly increased our development licenses sold compared to 1998. This
action could generate significant follow-on sales of deployment licenses in
2000. A customer's successful development of an application under a development
license can lead to additional revenue from deployment licenses. The scalability
of the Versant solution enables customers to add end-users, providing additional
license revenue to us as customers expand their use of the product. The
adaptability of the Versant technology to a wide range of applications allows
customers to develop applications for other functions. We also license our
products on a project basis, with development and deployment licenses bundled at
a lower price to the customer than if the customer had purchased such licenses
separately. *Although we seek to increase our number of customers, typically
through relatively smaller licenses, we believe that our practice of licensing
our products on a project basis will increase. *This increase in projects could
result in our realizing larger amounts of revenue at the beginning of a project
than it otherwise would, with potentially reduced recurring revenue
opportunities from such project in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors--Our
revenue levels are unpredictable."
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Products and Services
Our key products are the Versant ODBMS, a high performance object database
management system, and Versant Enterprise Container (VEC). *In addition, we
offer object-oriented programming language interfaces, database query tools,
application development tools and integration's with system management tools.
Customers licensing the Versant ODBMS receive the database engine with one
object-oriented programming language interface and a set of integrated database
utilities. For additional fees, customers may obtain additional programming
language interfaces, and users requiring continuous operation in
mission-critical environments can license the Versant Fault Tolerant Server. We
offer a variety of services to assist customers in the design, development and
management of their database applications, including training, consulting and
custom development services.
Products
Core Database Products
o Versant ODBMS. The Versant ODBMS is designed to support multi-user, commercial
applications in distributed environments. Its balanced client-server
architecture enables the system to process a wide variety of abstract data types
and complex applications in a highly concurrent, high performance manner. The
product is designed to integrate over 65,000 databases connected over a like
number of locations on a variety of hardware and software platforms. Each
database has a theoretical storage capacity of 4.6 million terabytes, an amount
far beyond the actual capacity of most existing operating systems. The Versant
ODBMS implements a variety of database features, including two-phase commits for
distributed transaction integrity and database triggers to monitor changing
events and data and to notify users and applications when specified events
occur. In addition, on-line management utilities enable routine maintenance to
be performed while the database is running. These include utilities to perform
backup operations, manage log files, dynamically evolve database schema, add,
delete and compact volumes on disk storage and related functions. These
utilities provide multiple levels of administrative access and application
security. With the version 5.2 of the Versant ODBMS, we provide external
transaction coordination from third-party transaction monitors, parallel queries
to multiple Versant databases, distributed on-line backup of multiple Versant
databases, persistent database event, and enhanced system management
capabilities. We believe these new features extend our role as the premier
object database provider for enterprise computing.
o Versant Fault Tolerant Server. For continuous operation in mission critical
environments, we offer the Versant Fault Tolerant Server. This product ensures
transparent failure recovery by connecting database clients to synchronized
copies of the database stored on physically separate computers. If one of the
databases fails due to operating system failure, hardware breakdown or other
interruption, the other database continues operation without application
interruption. When the failed database is restored, the two databases
automatically resynchronize and resume operations without application
interruption.
Language Solutions
The Versant ODBMS implements an object model that is a superset of the
capabilities of C++ and Java. The interface to these object-oriented languages
make the database appear to be a natural and transparent extension of the
language. Programs written in any of these languages can use objects written in
another, allowing integration of corporate data stores regardless of application
development language. Versant's Java Direct Interface, enables seamless
persistence for Java applications that will run on any computing platform
without modification. In addition, we provide a C language interface.
Internet-based Products
Versant Enterprise Container (VEC). The VEC enables users to deploy
Java-based applications using Java 2 Enterprise Edition (J2EE) technologies such
as Enterprise Java Beans that take advantage of the capabilities of the Versant
ODBMS without customizing the applications for the Versant ODBMS. The VEC
supports the BEA WebLogic application server and the IBM WebSphere Application
Server. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--We depend on successful technology
development."
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Data Access and Integration Tools
The Versant ODBMS allows users a choice of access methods for querying and
manipulating data in the Versant ODBMS and to obtain data from relational
databases. With the Versant SQL Suite, we offer open database connectivity
capability and structured query language access to data stored in relational
databases using industry-standard off-the-shelf query and reporting tools. These
tools permit customers to retain their investments in legacy systems while
addressing new applications with the productivity, flexibility and performance
characteristics available through object technology.
Licensing and Pricing of Products
We license our products directly to end-users principally through four types
of licenses--development licenses, deployment server licenses, deployment client
licenses and project licenses (which include development and deployment
licenses). Development licenses are sold on a per seat basis and authorize the
customer to develop an application program that uses the Versant ODBMS. Before a
customer may deploy an application, it must purchase at least one deployment
server license and one deployment client license for each computer connected to
the server that will run the application using the database. If the customer
wishes to install several copies of the application, separate deployment
licenses are required for each server computer and each client that will run the
particular application. We also license our products on a project basis, where
the customer simultaneously purchases development and deployment licenses for an
entire project.
Prices for our development and deployment contracts range from the low
thousands to the high millions depending on a variety of variables. These
variables include, but are not limited to the following: number of users
(specific number or unlimited), number of deployments, timeframe of deployments,
prepaid or as needed deployments, type of operating system(s), type of server(s)
and are the servers single or multiprocessor machines. We provide alternative
pricing for non-interactive environments where the product is deeply embedded in
a component, such as a telephone switch, and does not have end users. Sales
through distributors generally involve a significant discounts. Prices for
project licenses will vary with the scope and nature of the underlying project.
A typical value-added reseller develops an application incorporating the
Versant ODBMS and then licenses the application to our customer. Value-added
resellers purchase development licenses from us on a per seat basis on terms
similar to those of development licenses sold directly to end-users. Value-added
resellers are authorized by us to sub-license deployment copies of the Versant
ODBMS, together with the value-added resellers' applications, to end-users.
Deployment license pricing for sales through value-added resellers generally is
based either on a percentage of the total price charged by the value-added
reseller to our end-user customers or are based on a percentage of our list
prices. We also enter into project licenses with certain value-added resellers.
Services
We offer a variety of services to assist customers in the design,
development and management of their database applications. Training is offered
in a variety of Versant-specific and object-related technologies and ranges from
beginning to advanced levels. Consulting services are available for analysis and
design assistance, mentoring and technical transfer, application coding, design
reviews and performance analysis. In addition, we provide custom development
services to customers that request unique or proprietary product extensions.
These services may be performed by third-party integrators, consultants, or us,
depending on the nature and complexity of the request. Maintenance and technical
support services are available at an annual fee that varies depending on the
type of support that the customer requires. Maintenance and support contracts,
which typically have twelve-month terms, are offered concurrently with the
initial license of a Versant product and entitle the customer to telephone
support and to product and documentation updates. For additional fees, customers
may purchase a special support package providing a dedicated support engineer,
and may obtain telephone support available 24 hours per day. All maintenance
contracts are renewable annually.
Customers and Applications
The Versant ODBMS and Versant Enterprise Container are licensed for
development and/or deployment in a wide range of applications. Many of our
customers have licensed multiple copies for use in different applications. Sales
to
8
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Ericsson Radio Systems, Siemens Medical and CDC of Canada together
represented 12.8% of our total revenue in 1999; however, no single customer
accounts for 10% or more of our 1999 total revenue.
In any given quarter, it is typical for a relatively small number of
customers to constitute a significant percentage of our total revenue. In 1997,
1998 and 1999, 39%, 42% and 30% of our total revenue were attributable to sales
of products and services to telecommunications companies. In addition, in 1999,
7.1% and 4.6% of our total revenue were attributable to sales of products and
services in the financial services and technology markets *Our future
performance will depend in significant part on the continued growth of the use
of ODBMSs in telecommunications and financial market applications and the
acceptance of our products within the telecommunications and financial services
industries. *In addition, we expect to become increasingly dependent upon the
Internet-based and financial services markets. The failure of our products to
perform favorably in and become an accepted component of telecommunications,
Internet-based or financial services applications, or a slower than expected
increase or a decrease in the volume of sales of our products and services to
telecommunications, Internet-based or financial services companies, could have a
material adverse effect on us.
The following examples illustrate some of the new applications for Versant
in our core markets (telecommunications, financial services, defense and
transportation) and in our strategic e-business market.
Core Market Customers
3Com/Bull alliance selected Versant for its Intelligent Networking Solution
("IN"). Their IN solution allows network service providers (NSPs) with access to
Signaling System 7 (SS7) to connect their 3Com Total Control multi-service
access platform to the telephone trunk network. This, in turn, permits carriers
and NSPs to roll out scalable Internet-based services, including data, voice and
fax services, over their existing data infrastructure. The 3Com Total control
solution is a modular technology capable of accommodating dial-in Internet
access, Internet Protocol (IP) telephony, managed remote access, dial-out
services and cellular access.
Check Point Software Technologies selected Versant Asynchronous Replication
(VAR) for its call center application and is scheduled for production deployment
next month. Check Point Software uses VAR in conjunction with Primus software in
order to more efficiently share data between our world wide support centers. VAR
was deployed to help Check Point meet key design goals, which include
accelerating the workflow process and enhancing data sharing between global
sites in order to improve customer response and decrease operational costs.
Banque Nationale de Paris selected Versant as the Object Database Management
System (ODBMS) of choice for its Equities Group, the world leader in OTC equity
options and the second largest in overall equities products. Versant ODBMS
technologies are being used in a key BNP online trading application, called
Market Data Server (MDS). In real-time MDS consolidates market data including
stock volatility, dividend and interest rates from around the world. BNP traders
now have the most up-to-date data needed to price their derivatives instruments.
The level of complexity in the application, collecting market data from a
variety of sources, coupled with BNP's availability requirements, mandated the
selection of an ODBMS and VAR. More traditional RDBMS were not able to scale and
deliver fast performance. Additionally, VAR provided real-time update capability
without impacting that performance.
Versant technologies are the foundation for the eXpanded Straight Through
Processing (X-STP) system, called FARAO CSD, the first fully event driven
real-time Central Securities Depositories (CSDs) solution. Developed by Axioma,
a leading software provider of enterprise Internet solutions, and based on
Versant's Object Database Management System (ODBMS), X-STP is the first
application to facilitate both domestic and cross border settlement and other
financial services, e.g. custody services, securities lending and borrowing or
collateral management without human intervention. The first CSD to implement
Axioma's state of the art solution is the Oesterreichische Kontrollbank AG
(OeKB), Austria's main financial and information service provider for exports
and the capital market. OeKB is Clearing House and Central Securities Depository
for the Austrian capital market and is partnering with other European CSDs. OeKB
services include safekeeping and administration, book entry transfers, clearing
and settlement of stock exchange and OTC transactions, and issue of global
instruments of certificates for foreign registered shares. In addition to the
Austrian Central Bank and Vienna Stock Exchange, OeKB partners include 97
national commercial banks and brokers, and 28 international business partners.
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e-business Customers
NetCentrex, a France Telecom spin-off, conducted an evaluation and also
selected Versant as the foundation for its Personal Call Agent (PCA)
application. PCA allows service providers the ability to offer traditional
Centrex services to both telephony and Voice over IP (VoIP) users. The services
include a network-based corporate directory, personal contact and groups
management, call filtering and network-based universal messaging. The Java-based
user interface allows web-based provisioning, simplifying the addition of new
services.
iVendor Inc, a newly launched e-merchandising network, has chosen Versant's
Object-based technologies to provide a highly flexible and scalable platform for
presenting millions of products from multiple vendors, through virtually
thousands of online store operators. With the Versant ODBMS as one key component
of its architecture, iVendor's e-merchandising network is now able to handle the
tremendous demands of high traffic content sites, allowing reliable, consistent
performance even at peak load periods. The iVendor network, the first of its
kind, brings together products from independent suppliers into a central Versant
database for presentation to iVendor online retailers, who then select products
to create their own customized e-commerce sites. It has been architected to
handle literally thousands of online storefronts offering millions of products,
each product containing changing price points and presentations.
France Telecom , one of the world's leading telecommunications carriers with
1998 revenues of $24 billion, initiated a study in 1998 to evaluate key software
technologies for it's middle-tier information technology (IT) infrastructure, a
program internally dubbed "@rchimede". Technologies evaluated included object
modeling tools, application servers, EJBs and XML. Over a two year period France
Telecom conducted performance and usability benchmarks to test the technology
components against real-world application scenarios. The results indicated that
traditional RDBMS environments could not deliver the performance required.
France Telecom selected EJB technology, combined with Versant's object-oriented
technologies, to provide middle-tier persistence, to increase performance and to
enable an easy-to-use development environment. France Telecom standardized on
Versant technologies for development of all object-based applications, including
Voice over IP (VoIP), micro-payments, network management, directory services for
Internet portals, customer service, real-time management of leased lines and the
design of their mobile network.
Covia's (formerly Glyphica) "customer portal" uses Versant object-based
technologies as the foundation to help manage their customers over the Internet
and provide their sales teams with customer data, documents and dialogue through
a similar Web interface. Glyphica's PortalWare allows organizations with complex
sales cycles and products to use the Internet to accelerate their sales cycles
and create one-to-one relationships with their customers and partners. Marketing
and sales professionals can create personalized extranets at the touch of a
button, creating a window for exchanging business information with each and
every customer.
The above four companies exemplify Versant's thrust into e-business. This
new segment of our business is the fastest growing portion of the company's
portfolio, and as demonstrated, shows applications ranging from portals to
Application Service Provisioning (ASP) to internet infrastructure. Further
customer examples representative of this shift in 1999 include; CyberRoad
(formerly Calvex), Orange County California, Ericsson-USA, Factiva, Firemans
Fund, Intel, MCI-WorldCom, Nth Degree, Platform7, Quadrian, StellarX,
Software.com and Whiplash.
Marketing and Sales
We market and sell the Versant ODBMS in the United States principally
through our direct sales force and value-added resellers and internationally
through our distributors, direct sales force and value-added resellers.
Direct Sales
As of December 31, 1999, our direct sales organization consisted of 25
employees based at our corporate headquarters in Fremont, California and at our
other regional offices around the world. The direct sales organization includes
a telesales force that supports our field sales personnel and maintenance
renewals and handles smaller orders. The direct sales organization also includes
systems engineers who answer technical questions and assist customers in running
benchmarks against competitive products and developing prototype applications.
In 1997, 1998 and 1999, sales by our direct sales force (including sales to
value-added resellers) accounted for over 99%, 99% and 78%, respectively, of our
total revenue.
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Indirect Sales
An important part of our sales strategy, going forward, will be the
continued development of indirect distribution channels, such as value-added
resellers, systems integrators and foreign distributors. With the continuing
growth in the internet business arena, our focus towards indirect sales channels
is expected to be more important as we penetrate the e-business market. Typical
value-added resellers build application programs in which they embed a
deployment copy of the Versant ODBMS. Systems integrators may include our
products with those of others to provide a complete solution to their customers.
Foreign distributors include distributors based in Japan, Italy and Israel.
Value-added resellers are typically not subject to any minimum purchase or
resale requirements and can cease marketing our products at any time. Certain
value-added resellers, distributors and systems integrators also offer competing
products that they produce or that are produced by third parties. During 1999 we
had 14 value-added resellers and 3 distributors contribute, collectively, $5.7
million dollars of indirect revenue (consisting of product royalties and
deployment licenses).
Marketing
As part of our restructuring effort in 1999, we reduced marketing headcount
and budget to focus the company's efforts on rebuilding the product line for our
strategic e-business segment. In fourth quarter 1999, a Vice President of
Marketing was hired to develop and implement programs geared to communicating
Versant's new e-business position to external and internal audiences. Programs
include: Media and Analyst Relations, Investor Communications, Speaker's
Program, Online Marketing, Partner Marketing Programs and Conference/Tradeshows.
Sales Process
The sales cycle for our core products to new customers often exceeds six
months and may extend to a year or more. The sales cycle to Internet startups
are shorter in length, typically 3 to 6 months, due to the increasing market and
competitive pressures on them to bring new services or products to market. For
existing customers with successful deployed applications, sales cycles for new
applications of the Versant ODBMS are generally much shorter. During the sales
cycle, meetings involving both technical and management staff are frequently
conducted at the customer's site and at our headquarters. Prospective customers
typically perform a detailed technical evaluation or benchmark of the Versant
object-based technologies and, often, competitive products, as a part of the
selection process. Upon completion of the evaluation, the customer may purchase
one or more development licenses for the team of programmers that will build the
application. Additionally, the customer may order maintenance, training courses
and assistance from our consultants. A customer can purchase a deployment
license at the same time as it purchases a development license, or can purchase
a project license that covers development and deployment for an entire project.
However, many customers defer their purchase of a deployment license and related
maintenance until they complete application development (a process that
typically takes at least six months and can exceed one year) and then decide to
deploy the application.
For deployed applications, a customer may purchase additional deployment
licenses as additional users are added to a system, without further deliveries
from us, providing additional revenue over an extended period at a relatively
low incremental cost to us. Depending on the application type and the customer
size, it is possible for the price of a customer's deployment licenses to
substantially exceed the price of earlier development licenses.
Shipping and Backlog
Our software is typically shipped to customers shortly after the execution
of a license agreement and upon our receipt of the order. As a result, we
typically do not have a material backlog of unfilled license orders at any given
time, and we do not consider backlog to be a meaningful indicator of future
performance.
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Research and Development
*We have committed, and expect to continue to commit, substantial resources
to our research and development efforts. Our current development efforts are
focused on:
(1) continuing to leverage Java for e-business applications
(2) improving the integration of Versant products with leading
application-servers and middleware technologies
(3) improving performance and scalability of the Versant ODBMS
(4) improving integration between the Versant ODBMS and relational
databases
(5) leveraging XML and Versant products for business-to-business
applications and portals
Research and development expenses were approximately $5.2 million, $7.7
million and $7.0 million in 1997, 1998 and 1999 respectively. To date, all
research and development expenditures have been expensed as incurred.
The Versant ODBMS has, to date, been almost entirely developed by our
research and development personnel. Our development team consisted of 46
full-time employees as of December 31, 1999, most of whom are software engineers
with significant experience and expertise in such technologies as:
(1) object-oriented software development, including Java
(2) relational database technology
(3) platform engineering
(4) design and integration and
(5) large-scale run-time environments
(6) middleware technologies
We selectively supplement our internal staff with outside consultants having
expertise in specific areas.
In 1997, we began performing certain porting and enhancement engineering
work in Pune, India, by subcontracting work through Netcon Systems, a Software
Technology Park (STP) company. A STP company is a software development company
shielded from import and export duties, so that India can promote its
specialized software labor pool. In December 1998, we, with two Indian citizens,
sponsored the creation of a STP company named Versant India. In March 1999, we
purchased the common stock of Versant India from its founders. Versant India is
our wholly owned subsidiary and will continue to do porting and development
projects for us. Versant India has 16 employees and occupies a rented facility
of 7,500 square feet in Pune, India.
In 1998, we also added 14 engineers with our acquisition of Soft Mountain.
As of December 31, 1999, the headcount at Soft Mountain is four. The development
effort originally conducted by the Soft Mountain subsidiary has been transferred
to our Versant India research and development facility in order to better
utilize our worldwide development resources. *Our future success will depend on
our ability to attract, train and retain highly skilled research and development
personnel. Competition for such personnel is intense, especially the competition
for personnel familiar with object-oriented technology. *We expect that such
competition will continue for the foreseeable future and may intensify.
*We believe that our future results will depend on our ability to improve
our current technologies and to develop new products and product enhancements on
a timely basis. The market for our products and services is characterized by
changing customer demands, rapid technological change and frequent introductions
of new products and product enhancements. Customer requirements for products can
change rapidly as a result of innovations or changes within the computer
hardware and software industries, the introduction of new products and
technologies (including new hardware platforms and programming languages) and
the emergence, evolution or widespread adoption of industry standards. The
actual or anticipated introduction of new products, technologies and industry
standards can render existing products obsolete or unmarketable or result in
delays in the purchase of such products. As a result, the life cycles of our
products are difficult to estimate. *We have in the past experienced delays in
the introduction of new products and features, and may experience such delays in
the future. If we are unable, for technological or other reasons, to develop new
products or enhancements of existing products in a timely manner in response to
changing market conditions or customer requirements, our business, operating
results and financial condition will be materially adversely affected.
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New products or new versions of existing products may, despite testing,
contain undetected or unresolved errors or bugs that will delay their
introduction or adversely affect their commercial acceptance, which could have a
material adverse effect on our business, operating results and financial
condition.
Intellectual Property and Other Proprietary Rights
We rely primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary technology. For example, we license our software pursuant to signed
license agreements and, to a lesser extent, "shrink-wrap" licenses displayed in
product packaging, which impose certain restrictions on the licensee's ability
to utilize the software. In addition, we seek to avoid disclosure of our trade
secrets, including requiring those persons with access to our proprietary
information to execute confidentiality agreements with us, and we restrict
access to our source code. We seek to protect our software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. On October 13, 1998 we were awarded a United States patent
(No. 5,822,759) for our proprietary Cache System used within our Versant ODBMS
product.
For a discussion of the intellectual property risks we face, see
"Management's Discussion and Analysis of financial Condition and Results of
Operations--Risk Factors--We must protect our intellectual property."
Competition
For a discussion of the competition we face in our business, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors--We face intense competition."
Employees
As of December 31, 1999, we and our subsidiaries had a total of 108
employees, 60 of whom were based in the United States, 32 of whom were based in
Europe, and 16 of whom were based in India. Of the total, 46 were engaged in
engineering and technical services, 27 were engaged in sales and marketing, 19
were engaged in the services organization and 16 were engaged in administration
and finance. None of our employees is represented by a labor union with respect
to his or her employment by us. We have experienced no organized work stoppage
to date and believe that our relationship with our employees is good.
*Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel. The loss of
the services of one or more of our key employees could have a material adverse
effect on our business, operating results and financial condition. *Our future
success also depends on our continuing ability to attract, train and motivate
highly qualified technical, sales and managerial personnel. Competition for such
personnel is intense, especially in Silicon Valley where our headquarters are
located, and we may not be able to attract, train and motivate such personnel.
Item 2. Description of Property
In August 1997, we moved our principal administrative, sales, marketing and
research and development operations to a new headquarters facility in Fremont,
California, where we occupy 54,000 square feet under a 10 year lease. We believe
that the Fremont facility will be adequate for our requirements for the next
several years. We and our subsidiaries also lease space for sales offices,
generally under multi-year operating lease agreements, in Pune, India;
Frankfurt, Germany; Munich, Germany; Paris, France; and Hampshire, England.
Item 3. Legal Proceedings
Our company and certain of our present and former officers and directors
were named as defendants in four class action lawsuits filed in the United
States District Court for the Northern District of California, filed on January
26, 1998, February 5, 1998, March 11, 1998 and March 18, 1998, respectively. On
June 19, 1998, a Consolidated Amended Complaint was filed in the above mentioned
court, by the lead Plaintiff named by the court. The amended complaint alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and
Securities and Exchange Commission Rule 10b-5 promulgated under the Securities
Exchange Act, in connection with public statements about the Company's
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expected financial performance. The complaint seeks an unspecified amount of
damages. We vigorously deny the plaintiffs' claims and have moved to dismiss the
allegations. The Plaintiff has filed a response to our motion to dismiss and we
have filed an opposition to Plaintiff's response. The motion to dismiss was
submitted to the court for consideration on November 13, 1998 and the court has
not yet issued a decision. Securities litigation can be expensive to defend,
consume significant amounts of management time and result in adverse judgments
or settlements that could have a material adverse effect on our results of
operations and financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock
Our common stock is quoted on the Nasdaq National Market under the symbol
"VSNT." Our common stock commenced trading on the Nasdaq National Market on July
18, 1996. From July 19, 1999 until March 7, 2000, our common stock was quoted on
the Nasdaq SmallCap Market.) Prior to July 18, 1996, there was no public trading
market for our common stock. The following table lists the high and low closing
prices during for the last three full years (based on closing prices as reported
by Nasdaq).
High Low
-------- ---------
1997:
First Quarter $ 22 3/4 $ 8 1/2
Second Quarter $ 9 3/8 $ 4 1/8
Third Quarter $ 16 1/4 $ 6
Fourth Quarter $ 18 5/8 $ 11 1/8
1998:
First Quarter $ 14 9/16 $ 5 1/8
Second Quarter $ 7 5/16 $ 3 3/4
Third Quarter $ 5 1/2 $ 2 1/8
Fourth Quarter $ 4 1/4 $ 1 13/16
1999:
First Quarter $ 2 15/32 $ 1
Second Quarter $ 2 31/32 $ 1 1/8
Third Quarter $ 3 5/32 $ 2
Fourth Quarter $ 11 13/16 $ 2 3/8
There were approximately 118 holders of record of our common stock as of
February 29, 1999. We believe that a significant number of beneficial owners of
our common stock hold their shares in street name. Based on information
available to us, we believe we have at least 400 beneficial shareholders of our
common stock.
Dividend Policy
We have neither declared nor paid cash dividends on our common stock in the
past. *We intend to retain future earnings, if any, to fund development and
growth of our business and, therefore, do not anticipate that we will declare or
pay cash dividends on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
On July 12, 1999, we issued shares of a newly designated Series A Preferred
Stock ("Series A Stock"). A total of 1,489,799 shares of Series A Stock were
issued, with each share of Series A Stock intitially convertible into two shares
of the Company's common stock at the market price of the Company's common stock
effective July 12, 1999. Nine hundred and two thousand nine hundred and forty
six (902,946) of the shares of Series A Stock were issued in exchange for an
outstanding convertible secured promissory note with outstanding principal and
interest of $3,846,550.82 held by Vertex Technology Fund, Ltd. ("Vertex"), and
586,853 of the shares were issued in consideration of an additional $2,499,994
in new financing. One million dollars of the new financing was provided by a
Vertex affiliate, with the remainder provided by other investors. Each share of
Series A Stock was sold at a price of $4.26 per share. We also issued warrants
to purchase a total of 1,489,799 shares of our common stock at an exercise price
of $2.13 per share as part of the transaction.
The Series A Stock has a liquidation preference equal to 150% of the full
amount paid for the Series A Stock, with the preference increasing by an
additional 50% per year over each of the next two years, so long as the Series A
Stock is
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outstanding. The Series A Stock automatically converts into common stock if our
common stock price exceeds $12.00 per share for 45 consecutive business days.
The holders of Series A Stock will generally vote with the holders of common
stock provided that the Series A Stock is only entitled to a number of votes
equal to 50% of the number of shares of common stock into which the Series A
Stock is convertible. The holders of Series A Stock were also provided with
certain voting protective provisions.
Neither the Series A Stock nor the warrants have been registered under the
Securities Act of 1933, and may not be offered or sold in the United States
absent registration or an exemption from applicable registration requirements.
Investors in the financing were provided with certain registration rights
relating to the shares of Series A Stock and warrants purchased by them. Each
investor also agreed not to purchase more than 100,000 additional shares in the
Company without our approval so long as such investor holds more than 5% of our
outstanding securities.
On November 1, 1999, we signed an agreement with a public relations firm ,
whereby the firm provided certain public relations services for our company. We
agreed to compensate the firm for services rendered at a monthly rate of $5,000
per month and as further compensation we issued warrants to purchase up to
125,000 shares of our common stock. Warrants for 25,000 shares vested
immediately and have an exercise price of $3.00 per share. The remaining
warrants for up to 100,000 shares were scheduled to vest in November 2003 with
an exercise price of $10.00 per share unless certain target stock prices were
achieved. If target stock prices were achieved, the exercise price of the
warrants would be adjusted and vesting accelerated. The public relations firm
achieved a majority of its performance criteria during the fourth quarter of
1999. As a result, the warrants were valued using the Black-Scholes valuation
model at the dates when the performance criteria were met. We recorded $337,000
to general and administrative expense in 1999 related to the warrants. As of
December 31, 1999, warrants for 75,000 of the 100,000 shares had vested and the
exercise prices were reduced to a weighted average of $4.50 per vested share.
These warrants expire in November 2002.
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Item 6. Management's Discussion and Analysis of Financial Condition and Result
of Operations
As indicated in the first paragraph of Item 1, above, this Form 10-KSB
contains certain forward looking statements within the meaning of the Securities
Exchange Act the Securities Act. We have identified, with a preceding asterisk,
various sentences within this Form 10-KSB which contain such forward-looking
statements and words such as "believe," "anticipate," "expect," "intend" and
similar expressions are also intended to identify forward looking statements,
but these are not the exclusive means of identifying such statements. The
forward looking statements included in this Form 10-KSB involve numerous risks
and uncertainties which are described throughout this Form 10-KSB, including
under "Revenues" and "Risk Factors" within this Item 6. The actual results that
we achieve may differ materially from any forward looking statements due to such
risks and uncertainties.
The following table presents statements of operations data for the five
years ended December 31, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands, except per share data)
------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA: 1999 1998 1997 1996 1995
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
License $ 17,074 $ 14,463 $ 21,363 $12,202 $ 7,810
Services 8,794 8,770 7,827 6,191 4,067
----------- ---------- ---------- ----------- -----------
Total revenue 25,868 23,233 29,190 18,393 11,877
Cost of revenue:
License 745 2,846 1,445 1,144 1,062
Services 4,180 6,893 5,010 2,987 2,258
----------- ---------- ---------- ----------- -----------
Total cost of revenue 4,925 9,739 6,455 4,131 3,320
----------- ---------- ---------- ----------- -----------
Gross profit 20,943 13,494 22,735 14,262 8,557
----------- ---------- ---------- ----------- -----------
Operating expenses:
Marketing and sales 9,883 18,511 17,265 8,327 6,319
Research and development 7,011 7,722 5,225 3,323 2,048
General and administrative 3,658 3,857 2,880 1,501 1,419
Amortization of goodwill 463 546 370 - -
Write down of assets - 1,555 - - -
Acquired in-process R&D cost - 528 - - -
Non Cash Compensation Expense 337 - - - -
----------- ---------- ---------- ----------- -----------
Total operating expenses 21,352 32,719 25,740 13,151 9,786
----------- ---------- ---------- ----------- -----------
Income (loss) from operations (409) (19,225) (3,005) 1,111 (1,229)
Interest income (expense) and
other, net (1,273) (692) 705 429 70
----------- ---------- ---------- ----------- -----------
Income (loss) before taxes (1,682) (19,917) (2,300) 1,540 (1,159)
Provision for income taxes 54 18 40 129 73
----------- ---------- ---------- ----------- -----------
Net income (loss) $ (1,736) $(19,935) $ (2,340) $ 1,411 $(1,232)
=========== ========== ========== =========== ===========
Basic net income (loss) per share ($0.17) ($2.16) ($0.26) $0.24 ($0.41)
=========== ========== ========== =========== ===========
Shares used in calculating basic net
income (loss) per share 10,178 9,209 8,931 5,916 2,987
=========== ========== ========== =========== ===========
Diluted net income (loss) per share ($0.17) ($2.16) ($0.26) $0.18 ($0.41)
=========== ========== ========== =========== ===========
Shares used in calculating diluted net
income (loss) per share 10,178 9,209 8,931 7,690 2,987
=========== ========== ========== =========== ===========
</TABLE>
Overview
We were incorporated in August 1988 and commenced commercial shipments of
our principal product, the Versant ODBMS, in 1991. Since that time,
substantially all of our revenue has been derived from:
Primarily
(1) sales of development, deployment licenses and project licenses for the
Versant ODBMS
(2) related maintenance and support, training, consulting and nonrecurring
engineering fees received in connection with providing services
associated with the Versant ODBMS and
(3) sales of the peripheral products for the Versant ODBMS
17
<PAGE>
Secondarily
(1)the resale of licenses, maintenance, training and consulting for
third-party products that complement the Versant ODBMS
We released Version 5.2 of the Versant ODBMS in December 1998. *We currently
expect that licenses of the Versant ODBMS, Versant Enterprise Container and
peripheral products and sales of associated services will be our principal
sources of revenue for the foreseeable future. In 1997, 1998 and 1999, three
customers, combined, accounted for approximately 36%, 17% and 13% of our total
revenue, and the telecommunications industry accounted for 39%, 42% and 30%of
our total revenue. In addition, in 1999, 12.8%, 7.1% and 4.6% of our total
revenue were attributable to sales of products and services in the e-business,
financial services and high technology markets. *Our future performance will
depend in significant part on the continued growth of the e-business market and
its dependence on highly scalable, performance and reliable object-based
technologies such as ours. *The failure of our products to perform favorably in
and become an accepted component of these markets, or a slower than expected
increase or a decrease in the volume of sales of our products and services to
these same markets, could have a material adverse effect on us.
We license our products directly to end-users principally through four types
of licenses-development licenses, deployment server licenses, deployment client
licenses and project licenses. Development licenses are sold on a per seat basis
and authorize the customer to develop an application program that uses the
Versant ODBMS or VEC. Before a customer may deploy an application it has
developed under a development license, it must purchase at least one deployment
server license and one deployment client license for each computer connected to
the server that will run the application using the database management system.
If the customer wishes to install several copies of the application, separate
deployment licenses are required for each server computer and each client that
will run the particular application. Pricing of the Versant ODBMS and VEC varies
according to several factors, including the computer platform on which the
application will run and the number of users that will be able to access the
server at any one time. For certain applications, we offer deployment licenses
priced on a per user basis. We also license our products on a project basis,
where the customer simultaneously purchases development and deployment licenses
for an entire project.
Value-added resellers purchase development licenses from us on a per seat
basis, on terms similar to those of development licenses sold directly to end
users. Value-added resellers are authorized by us to sub-license deployment
copies of the Versant ODBMS or VEC, together with the value-added reseller's
application, to end-users. Deployment license pricing for sales through
value-added resellers generally represents either a percentage of the total
price charged by the value-added reseller to our end-user customers or a
percentage of our list prices. We also license our products to certain
value-added resellers on a project basis.
Our development, deployment and project license agreements and agreements
with value-added resellers typically require the payment of a nonrefundable,
one-time license fee for a license of perpetual term, although certain licenses
to value-added resellers are for a limited term and/or are limited to particular
applications. Revenue from license agreements is recognized upon shipment of the
software if there is no significant modification of the software, payments are
due within our normal payment terms and collection of the resulting receivable
is deemed probable. If an acceptance period is required, revenue is recognized
upon the earlier of customer acceptance or the expiration of the acceptance
period. Maintenance revenue is recognized ratably over the term of the
maintenance contract, which is typically twelve months. Training and consulting
revenue is recognized when a customer's order has been received and the services
have been performed. We have entered into contracts with certain of our
customers that require us to perform development work in return for nonrecurring
engineering fees. Revenue related to such nonrecurring engineering fees
generally is recognized using the percentage-of-completion method of accounting.
Amounts received from customers under certain license, maintenance and
nonrecurring engineering agreements involving significant continuing obligations
to be performed by us are included on our balance sheet as deferred revenue.
We license the Versant ODBMS, Versant Enterprise Container and peripheral
products and sell associated services primarily through our direct sales force
to end-user customers and value-added resellers. Through late 1993, we focused
our sales efforts on developing indirect sales channels and contracting for
nonrecurring engineering fees from our marketing partners. In late 1993, we
changed our sales strategy to a direct sales model and began increasing the size
of our direct sales force.
18
<PAGE>
During 1995, we entered into an agreement with ISAR-Vermogensverwaltung Gbr
mbH, an entity formed by a group of European investors, pursuant to which ISAR
organized and funded Versant Europe. Versant provided Versant Europe with
exclusive European distribution rights for our products, subject to the rights
of existing distributors, and with management responsibilities for Versant's
existing distributors in Europe. In March 1997, we exercised our option to
acquire Versant Europe. This acquisition, in which Versant paid approximately
$3.6 million in cash and stock, has been accounted for as a purchase. See note
10 of notes to our consolidated financial statements. As of December 31, 1999,
Versant Europe had 32 employees.
Since inception, we have invested significant resources in developing the
Versant ODBMS and related technologies and in building our sales, marketing,
consulting and administrative organizations. *Due to our financial performance
in 1998, we restructured our worldwide organization by significantly reducing
headcount in order to bring expenses in line with anticipated 1999 revenue.
*Because of this action and other expense controls implemented, we were able to
reduce in 1999 overall operating expenses by 35% to $21.4 million from $32.7
million in 1998. We expect to hire additional personnel and expect an increase
in our promotion and selling expenditures during 2000 if we believe that market
conditions support such expenses The labor market in which we operate is highly
competitive, and we may be unable to retain key employees without substantial
increases in our operating expenses.
Recent Events
Vertex Financing
On July 12, 1999, we issued shares of a newly designated Series A Preferred
Stock ("Series A Stock"). A total of 1,489,799 shares of Series A Stock were
issued, with each share of Series A Stock initially convertible into two shares
of the Company's common stock. Nine hundred and two thousand nine hundred and
forty six (902,946) of the shares of Series A Stock were issued in exchange for
an outstanding convertible secured promissory note with outstanding principal
and interest of $3,846,550.82 held by Vertex Technology Fund, Ltd. ("Vertex"),
and 586,853 of the shares were issued in consideration of an additional
$2,499,994 in new financing. A Vertex affiliate provided $1 million of the new
financing with the remainder provided by other investors. Each share of Series A
Stock was sold at a price of $4.26 per share. We also issued warrants to
purchase a total of 1,489,799 shares of our common stock at an exercise price of
$2.13 per share as part of the transaction.
The Series A Stock has a participating liquidation preference over our
common stock initially equal to 150% of the full amount paid for the Series A
Stock, which preference increases by an additional 50% per year over each of the
next two years, so long as the Series A Stock is outstanding. The Series A Stock
automatically converts into common stock if our common stock price exceeds
$12.00 per share for 45 consecutive business days. The holders of Series A Stock
will generally vote with the holders of common stock provided that the Series A
Stock is only entitled to a number of votes equal to 50% of the number of shares
of common stock into which the Series A Stock is convertible. The holders of
Series A Stock were also provided with certain voting protective provisions.
The shares eligible for resale upon execution of the warrants and
conversion of the preferred stock have been registered under the Securities Act
of 1933, under two separate registration statements on Form S-3. Each investor
also agreed not to purchase more than 100,000 additional shares in the Company
without our approval so long as such investor holds more than 5% of our
outstanding securities.
Results of Operations
Revenue
<TABLE>
<CAPTION>
1997 % Change 1998 % Change 1999
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
License revenue $21,363,000 (32%) $14,463,000 18% $17,074,000
As a percentage of total revenue 73% 62% 66%
Services revenue 7,827,000 12% 8,770,000 0.3% 8,794,000
As a percentage of total revenue 27% 38% 34%
Total revenue 29,190,000 (20%) 23,233,000 11% 25,868,000
</TABLE>
19
<PAGE>
Total revenue declined 20% from 1997 to 1998 but increased 11% from 1998 to
1999. We continue to experience significant annual and quarterly fluctuations in
total revenue. *We have experienced, in prior years, a seasonal pattern in our
operating results, with the fourth quarter typically having higher total revenue
and income from operations than the first quarter of the following year, however
we do not believe this trend will continue in 2000 compared to 1999. Also, see
the section below labeled "Risk Factors."
The decrease in license revenue in 1998 compared to 1997 was due primarily
to the timing and complexity of sales and our inability to close large project
opportunities.
The increase in license revenue during 1999 compared to 1998 was
attributable to:
Primarily
(1) increased sales in the defense and e-business market
(2) increased customer deployments of applications previously subject only
to development licenses, particularly in the telecommunications and the
internet market
Secondarily
(1) restructuring and refocusing efforts within the Company sales personnel
*We expect license revenue to increase in 2000 in absolute dollar terms
compared to 1999, due to increased license purchases by core and e-business
customers and increased sales by our Versant Europe subsidiary, each as a result
of our 1999 customer development activities. *We also believe that license
revenue as a percentage of total revenue will increase in 2000 compared to 1999.
However, due to risks highlighted in the section, "Risk Factors," below, license
revenue may decrease in absolute dollar terms or as a percentage of total
revenue in 2000 when compared to 1999.
The increase in services revenue during 1998 compared to 1997 was
attributable principally to increased maintenance revenue from a significantly
larger installed customer base, while training and consulting revenue declined
due to the reduction in overall license revenues. The marginal increase in total
services revenue in 1999 compared to 1998 was due to a 31% increase in
maintenance revenues but was offset by a corresponding decrease in consulting
revenues. The restructuring efforts within the services group did not allow us
to take advantage of the consulting projects that became available during the
year. *We expect that services revenue will increase in absolute dollar terms in
2000 as we increase our focus on consulting opportunities, but will decrease as
a percentage of total revenue. However, due to the risks highlighted in the
section, "Risk Factors," below, services revenue may not increase in absolute
dollar terms in 2000 compared to 1999.
We had no sales to customers representing more than 10% of total revenue in
1999 and 1998. In 1997 two customers accounted for $5.8 million and $3.1 million
in revenue, respectively.
International revenue increased 22% from $8.6 million in 1997 to $10.5
million in 1998. The increase in international revenue from 1997 to 1998 was
driven principally by higher sales by Versant Europe, Australia and Asia
Pacific, resulting from our increased marketing and sales investment, partially
offset by decreased sales in Japan. International revenues grew 21% from $10.5
million in 1998 to $12.7 million in 1999. This increase was again due to the
increases in Versant Europe's revenues partially offset by decreases in
Australia and Asia Pacific. In addition, as a result of the acquisition of
Versant Europe in March 1997, we began recognizing license and service revenue
from Versant Europe that would have been recognized only at 40 % and 25 %
royalty rates had Versant Europe not been acquired. *We intend to maintain our
sales and marketing activities outside the United States, including Europe,
Japan and other Asia/Pacific countries, which will require significant
management attention and financial resources, and which may increase costs and
impact margins unless and until corresponding revenue is achieved. Our
international sales are currently denominated predominantly in United States
dollars. An increase in the value of the United States dollar relative to
foreign currencies could make our products more expensive and, therefore, less
competitive in foreign markets. We believe that the increase in the value of the
United States dollar relative to foreign currencies in 1999 did not have a
material effect on our operating results. *To the extent that we increase our
international sales, our total revenue may be affected to a greater extent by
seasonal fluctuations resulting from lower sales levels that typically occur
during the summer months in Europe and other parts of the world. International
revenue as a percentage of total revenue increased from 29% in 1997 to 45% in
1998 and then increased to 49% in 1999. *Due to our increased emphasis on
international sales, especially through Versant Europe, we expect international
revenue to increase in absolute dollar
20
<PAGE>
terms but decrease as a percentage of total revenue; however, international
revenue may not grow at all. Our international operations are subject to
corresponding risks; see "Risk Factors--We depend on our international
operations."
Cost of Revenue and Gross Profit
<TABLE>
<CAPTION>
1997 % Change 1998 % Change 1999
------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Cost of license revenue $1,445,000 97% $2,846,000 (74%) $745,000
As a percentage of license revenue 7% 20% 4%
Cost of services revenue 5,010,000 38% 6,893,000 (39%) 4,180,000
As a percentage of services revenue 64% 79% 48%
Gross profit 22,735,000 (41%) 13,494,000 55% 20,943,000
As a percentage of total revenue 78% 58% 81%
</TABLE>
Cost of license revenue consists primarily of reserves for estimated bad
debts, product royalty obligations incurred by us when we sub-license tools
provided by third parties, royalty obligations incurred by us under a porting
services agreement, user manuals/product media, production labor costs, freight,
and packaging. Cost of license revenue during 1998 increased compared to 1997
due to increased reserves for bad debts, amortization of certain deferred
license costs and increased royalty costs. Cost of license revenue during 1999
decreased compared to 1998, primarily due to the elimination of amortization of
certain deferred license costs, and secondarily due to reduced bad debt reserves
and decreases in royalty costs. As part of the acquisition of Versant Europe, we
allocated $1.4 million of the purchase price to deferred license costs. In 1998
we recognized the remaining $1.0 million of these deferred license costs as a
cost of license revenue. *Although our cost of license revenue decreased in 1999
compared to 1998, both in absolute dollars and as a percentage of license
revenue, we expect 2000 cost of license revenue to decline as well compared to
1999 due to the reductions in our production costs, royalty costs and freight.
*For these reasons, we expect cost of license revenue to decrease slightly in
absolute dollar terms, as well as decline as a percentage of license revenue in
2000, if expected revenue growth materializes. However, revenue growth in 2000,
and therefore license revenue margin improvement, are subject to the risks
highlighted in the section, "Risk Factors", below.
Cost of services revenue consists principally of personnel costs associated
with providing consulting, technical support, training and nonrecurring
engineering work paid for by customers. The increase in cost of services revenue
during 1998 compared to 1997 was primarily attributable to the significant
increase in our service organization, due to a lack of third party support
services, the increased costs of providing maintenance support to a growing
customer base and secondarily to costs associated with employee turnover. Cost
of services revenue as a percentage of services revenue increased in 1998
compared to 1997. This increase was primarily due to reduced service support
productivity caused by reduced license revenues and higher consulting expenses
associated with the use of external consultants on specialized customer
projects, without an immediate increase in consulting and training revenue.
The decrease in cost of services revenue during 1999 compared to 1998 was
primarily attributable to the restructuring efforts worldwide in decreasing the
size of our service organization while refocusing our vision and efforts to
better serve our customer base worldwide. In so doing we were able to
significantly reduce services cost of revenues while supporting the higher
maintenance revenue levels compared to 1998. *We expect to increase our cost of
service revenue in 2000 compared to 1999, both in absolute dollars as well as a
percentage of revenues, through headcount and supporting expenses increases,
coupled with increases in productivity. These increases are necessary to support
our projected increases in services revenues and to support our increasing
efforts in the consulting business, which we intend to expand in 2000. The
increases in our e-business applications have given rise to substantial
increased opportunities to support our customer base more effectively by
offering additional consulting services, thereby reducing the need for our
customers to find and train addition personnel to implement new e-business
applications.
Marketing and Sales Expenses
<TABLE>
<CAPTION>
1997 % Change 1998 % Change 1999
------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Marketing and sales expenses $17,265,000 7% $18,511,000 (47%) $9,883,000
As a percentage of total revenue 59% 80% 38%
</TABLE>
21
<PAGE>
Marketing and sales expenses consist primarily of marketing and sales
personnel costs, including sales commissions, recruiting, travel, advertising,
public relations, seminars, trade shows, lead generation, product descriptive
literature, product management, sales offices, mailings and depreciation
expense. The increase in 1998 compared to 1997 was due to increased marketing
program costs to generate leads, partially offset by lower commission expenses
on reduced revenues. In addition, in 1998 we increased marketing spending to
expand worldwide awareness of our products and services, particularly in the
Internet-based and financial services markets. The substantial decrease in 1999
marketing expenses compared to 1998 was primarily the result of our worldwide
restructuring efforts and our decision to utilize the marketing program monies
more efficiently by reducing duplicate efforts and programs worldwide. The focus
is on worldwide programs versus regional programs, hence promoting a consistent
message to our current and potential customer base. Better utilizing the
internet to deliver our message will the goal in 2000. *We expect marketing and
sales expenses to increase in absolute dollar terms, due to increased efforts to
market our products to new (e-business) and existing (telco and financial
services) business markets. However, we intend to counterbalance this increase
with our restructured operations and our efforts to control commission costs and
costs associated with less focused marketing programs and accordingly expect
marketing and sales expenses to decrease as a percentage of revenue. *However,
if we increase our marketing and sales expenditures without corresponding
increases in revenue, our results of operations would be adversely affected.
Research and Development Expenses
<TABLE>
<CAPTION>
1997 % Change 1998 % Change 1999
---------- ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Research and development expenses $5,225,000 48% $7,722,000 (9%) $7,011,000
As a percentage of total revenue 18% 33% 27%
</TABLE>
Research and development expenses consist primarily of salaries, recruiting
and other personnel-related expenses, the costs of an ISO 9001 quality program,
depreciation or expensing of development equipment, supplies and travel. The
increase during 1998 compared to 1997 resulted from:
(1) higher compensation and other personnel expenses due to increased
headcount
(2) increased operating expenses due to new opportunities and expanded
projects
(3) costs of funding ongoing engineering activities in India
(4) additional operating expenses associated with Soft Mountain's
engineering activity
The decrease during 1999 compared to 1998 primarily resulted from, reduced
compensation and other personnel expenses due to decreases in headcount and
secondarily due to reduced operating expenses associated with Soft Mountain's
engineering activity.
We believe that a significant level of research and development
expenditures is required to remain competitive and complete products under
development. *Accordingly, we anticipate that we will continue to devote
substantial resources to research and development to design, produce and
increase the quality, competitiveness and acceptance of our products. Due to our
restructuring activities, we reduced research and development expense in
absolute dollar terms and as a percentage of revenues in 1999. *Due to our
e-business efforts as well as ongoing improvements in our ODBMS products we
expect research and development expenses to increase slightly in 2000 in
absolute dollars, but decline as a percentage of revenues. Our objective is to
improve our R&D to revenue dollar productivity and better match R&D spending
with revenue increases. *However, if we continue our research and development
efforts without corresponding increases in revenue, our results of operations
would be adversely affected. To date, all research and development expenditures
have been expensed as incurred.
General and Administrative Expenses
<TABLE>
<CAPTION>
1997 % Change 1998 % Change 1999
---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
General and administrative expenses $2,880,000 34% $3,857,000 (5%) $3,658,000
As a percentage of total revenue 10% 17% 14%
</TABLE>
General and administrative expenses consist primarily of salaries,
recruiting and other personnel-related expenses for our accounting, human
resources, management information systems, legal and general management
functions. In addition, general and administrative expenses include outside
legal, audit and public reporting costs. The significant increase during 1998
compared to 1997 resulted from:
22
<PAGE>
(1) increased severance costs incurred in connection with changes to our
management team
(2) increased legal and accounting services
(3) expanded travel expense associated with funding projects
(4) increased facility costs
The decrease in general and administrative expenses in 1999 compared to
1998 were primarily due to the restructuring efforts taken in 1999 and
secondarily due to the continuing expense controls that are being used to
properly match expense trends with revenue trends. *We anticipate that general
and administrative expenses will increase in absolute dollar terms but decrease
as a percentage of revenues in 2000 compared to 1999 levels. This anticipated
increase is due to the need to rebuild part of the administrative staff that
were reduced in 1999, coupled with management's awareness to continue to improve
productivity by aligning expenses with revenue trends. *However, if we increase
our existing administration infrastructure without corresponding increases in
revenue, our results of operations would be adversely affected.
Amortization of Goodwill
The acquisition of Versant Europe in March 1997 resulted in our recording
an intangible asset representing the cost in excess of fair value of the net
assets acquired in the amount of $3.3 million, which is being amortized over a
seven-year period. During 1998 and 1999, we amortized $485,000 and $187,000,
respectively, of this amount. Additionally in 1998 we wrote down the Versant
Europe goodwill by $1.6 million due to our revised estimated discounted cash
flow over the next five years. *We will amortize $187,000 of this remaining
goodwill amount in 2000. See note 9 of notes to our consolidated financial
statements.
The acquisition of Soft Mountain in September 1998 resulted in our writing
off $528,000 of in-process research and development expenses associated with the
purchased software and recording an intangible asset representing the cost in
excess of fair value of the net assets acquired in the amount of $1.2 million,
which is being amortized over a five-year period. During 1999, we amortized
$245,000 of this amount. *We will amortize $245,000 of this amount in 2000. See
note 10 of notes to our consolidated financial statements.
Interest Income (Expense) and Other, Net
<TABLE>
<CAPTION>
1997 % Change 1998 % Change 1999
-------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Interest income (expense) and other, net $705,000 (198 %) ($692,000) 84 % ($1,273,00)
As a percentage of total revenue 2% (3%) (5%)
</TABLE>
Interest income (expense) and other, net represents income earned on our
cash, cash equivalents and short-term investments and interest expense
associated with our financing activities. The decrease in interest income
(expense) and other, net from 1997 to 1998 was primarily due to:
(1) decreased interest income from lower cash balances
(2) increased interest expense on bank debt and capital equipment leases
(3) increased interest expense on our convertible secured subordinated
promissory note
The sharp increase in interest income (expense) and other, net from 1998 to
1999 was due to the conversion of the Vertex convertible note to equity and the
subsequent write off of the remaining capitalized note discount of $787,000 as a
non-cash interest expense and $158,000 of accrued interest expense which was
converted to equity in association with the Vertex convertible note. See note
11 of notes to our consolidated financial statements.
Provision for Income Taxes
<TABLE>
<CAPTION>
1997 % Change 1998 % Change 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Provision for income taxes $40,000 (55%) $18,000 200% $54,000
As a percentage of income (loss) before income taxes (2%) (0%) (3%)
</TABLE>
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." We incurred net
operating losses in 1997 and 1998, resulting in no federal or state tax
23
<PAGE>
liability based on income. However, we did incur foreign withholding taxes of
$18,000 and $54,000 during 1998 and 1999, which are included within the income
tax provision.
At December 31, 1999, we had federal and state net operating loss
carryforwards of $33.6 million and $8.4 million and tax credit carryforwards of
$2.4 million expiring on various dates through 2019. *Due to our history of
operating losses through 1995 and in 1997, 1998 and 1999 and other factors, we
believe that there is sufficient uncertainty regarding the realizability of
these carryforwards, and therefore a valuation allowance of approximately $15.4
million has been recorded against our net deferred tax assets of approximately
$15.4 million. We will continue to assess the realizability of the tax benefit
available to us based on actual and forecasted operating results.
Due to the "change in ownership" provisions of the Internal Revenue Code of
1986, the availability of net operating loss and tax credit carryforwards to
offset federal taxable income in future periods is subject to an annual
limitation due to changes in ownership for income tax purposes. Usage of net
operating loss carryforwards is limited to approximately $4.0 million per year
because of past ownership changes.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
1997 % Change 1998 % Change 1999
----------- ----------- -------------- ------------ -----------
Net cash used in
<S> <C> <C> <C> <C> <C>
operating activities ($5,655,000) 88% ($10,628,000) (94%) ($669,000)
Year end cash, cash equivalents
And short-term investments $9,831,000 (64%) $3,564,000 3% $3,663,000
Year end working capital (deficit) $12,228,000 n/a ($3,303,000) n/a $1,584,000
</TABLE>
In 1999, net cash of $520,000 was used in operating activities primarily
due to the cash component of our net loss for 1999, increases in accounts
receivable, decreases in accounts payable, accrued liabilities and reduced
deferred revenue, which were offset by non-cash depreciation and amortization
expenses, non-cash compensation expense, non-cash accrued Vertex interest and
discount, decreases in prepaid expenses and other current assets, and a
decreased provision for doubtful accounts compared to 1998. The increase in
accounts receivable was due to reduced collection activity, and lower revenues
in the fourth quarter of 1999 compared to the fourth quarter of 1998. Through
February 29, 2000, we had collected $3.9 million of our December 31, 1999
accounts receivable balance, leaving an accounts receivable balance of $3.4
million related to the December 31, 1999 balance.
In 1998, net cash of $10.6 million was used in operating activities
primarily due to the cash component of our net loss for 1998, decreases in
deferred revenue, accrued liabilities and taxes and a decreased provision for
doubtful accounts, which were offset by a significant decrease in accounts
receivable, decreases in prepaid expenses and other current assets, and
increases in accounts payable compared to 1997. The decrease in accounts
receivable was due to improved collection activity, and lower revenues in the
fourth quarter of 1998 compared to the fourth quarter of 1997. Through February
28, 1999, we had collected $3.2 million of our December 31, 1998 accounts
receivable balance, leaving an accounts receivable balance of $3.0 million
related to the December 31, 1998 balance.
In 1999, our net cash used in investing activities was $115,000 due to our
$80,000 increased investment in Versant India and our $35,000 net purchase of
property and equipment, primarily for the acquisition of network and computer
equipment, associated with Y2k improvements. *We have and will continue to make
certain investments in software applications and systems to ensure that our
products continue to be Year 2000 compliant. We successfully crossed the Y2k
threshold with minor corrective actions, none of which had any impact on our
daily operating activities. See "Risk Factors--Our business may be harmed by
Year 2000 problems."
In 1998 we purchased $2.0 million of property and equipment, primarily for
the acquisition of network and computer equipment, leasehold improvements,
furnishings and fixtures for our headquarters. In addition, in September 1998,
we acquired Soft Mountain and paid the shareholders of Soft Mountain $136,000 in
cash in addition to issuing them 245,586 shares of our common stock. These uses
of cash for investing activities were entirely offset by net sales and
maturities of short-term investments.
24
<PAGE>
In 1999, financing activities provided a net increase of $727,000,
primarily due to proceeds from the sale of preferred stock to certain of our
largest shareholders, exercising of common stock warrants for common stock and
secondarily to the sale of common stock to our employees under employee benefit
plans. These increases were offset by the paydown of our short term receivables
line of credit and long term bank note, plus the normal principal payments made
under capital lease obligations.
In 1998, financing activities provided $6.5 million, primarily due to
proceeds from the sale of a convertible secured subordinated promissory note,
the sale of common stock to certain of our largest shareholders, the sale of
common stock to our employees under employee benefit plans and borrowings under
a short-term accounts receivable loan. These increases were partially offset by
principal payments made under capital lease obligations and our long term bank
note.
At December 31, 1999, we had $3.7 million in cash and cash equivalents and
positive working capital of approximately $1.6 million. We maintain a revolving
credit line with a bank that expires on September 30, 2000. The maximum amount
that can be borrowed under the revolving credit line is $5.0 million. As of
December 31, 1999, $900,000 was allocated to a standby letter of credit to
support our European banking line and $1.4 million of borrowings were
outstanding. Borrowings and the standby letter of credit under the revolving
credit line are limited to 80% of eligible accounts receivable and are secured
by a lien on substantially all of our assets. These borrowings bear interest at
the bank's base lending rate (8.50% at December 31, 1999, plus 2.0%). The loan
agreement contains financial covenants, commencing with this quarter ending
December 31, 1999, and also prohibits cash dividends and mergers and
acquisitions without the bank's prior approval. Certain of these new covenants,
which the Company was not in compliance with as of December 31, 1999, have been
waived through March 31, 2000. In March 2000, we negotiated new covenants for
the year ending December 31, 2000, based on the Company's forecasted
performance.
On March 19, 1998, we converted an interest only, variable rate note to a
variable rate, term loan with principal and interest payable over 36 months. The
term loan covenants and interest rate were amended in conjunction with the new
line of credit agreement. Borrowings under the loan are secured by a lien on all
assets acquired using the proceeds of the loan, which have been used for the
acquisition of equipment and leasehold improvements. The loan bears interest at
the bank's base lending rate (8.50% at December 31, 1999, plus 2.5%). The loan
contains certain financial covenants and also prohibits cash dividends and
mergers and acquisitions without the bank's prior approval. Certain of these
covenants, which we were not in compliance with as of December 31, 1999, have
been waived through March 31, 2000. In March 2000, we negotiated new covenants
for the year ending December 31, 2000, based on the Company's forecasted
performance.
*We believe that our current cash, cash equivalents, our lines of credit,
and the net cash provided by operations will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for 2000. At
December 31, 1999, our commitments for capital expenditures were not material.
*If cash provided by operations is insufficient to satisfy our liquidity
requirements, we will seek additional debt or equity financing. Such financing
may not be available on terms acceptable to us, if at all. The sale of
additional equity or convertible debt securities could result in dilution to our
shareholders. *A portion of our cash may be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. From time to time, we evaluate potential acquisitions of such
businesses, products and technologies.
To date, we have not achieved business volume sufficient to restore
profitability and a positive cash flow. We operated at a net loss of $1.7
million and $19.9 million in 1999 and 1998. We believe our available cash and
credit facilities should be sufficient to fund our operations, however there can
be no assurance of this and we are dependent upon future events, including our
ability to obtain additional debt or equity financing, if financial results fall
short of our goals. Additional debt or equity financing, may be required, and
may not be available to us on commercially reasonable terms, or at all. Even if
we were able to obtain additional debt or equity financing, the terms of this
financing may significantly restrict our business activities.
The actual cash resources required to successfully implement our business
plan in year 2000 will depend upon numerous factors, including but not limited
to those described in the following Risk Factors.
25
<PAGE>
Risk Factors
This Annual Report on Form 10-KSB contains forward-looking statements that
involve risks and uncertainties, including, but not limited to, those set forth
below, that could cause actual results to differ materially from those in the
forward-looking statements. The matters set forth below should be carefully
considered when evaluating our business and prospects.
Risks Related To Our Business
We have limited working capital. At December 31, 1999, we had only $1.6
million of working capital. To date we have not achieved profitability or
positive cash flow on a sustained basis. As our revenue is unpredictable, and a
significant portion of our expenses are fixed, a revenue shortfall could deplete
our limited financial resources and require us to substantially reduce
operations or to raise additional funds through debt or equity financings.
Additionally, as of December 31, 1999, we had approximately $1.2 million of bank
term debt financing outstanding, of which $71,000 a month is due and payable and
another $1.4 million of bank revolving line debt that is due as we collect from
our customers. From time to time we have been in violation of covenants of such
bank debt. We will need to generate sufficient earnings to repay such debt when
due, or raise additional funds through debt or equity financings. There can be
no assurance any equity or debt funding would be available to us on favorable
terms, if at all. The sale of additional equity or convertible debt securities
would result in dilution to our shareholders.
Our revenue levels are unpredictable. Our revenue has fluctuated
dramatically on a quarterly and annual basis, and we expect this trend to
continue. These dramatic fluctuations result from a number of factors,
including:
(1) the lengthy and highly consultative sales cycle associated with our
products
(2) uncertainty regarding the timing and scope of customer deployment
schedules of applications based on the Versant ODBMS
(3) fluctuations in domestic and foreign demand for our products and
services, particularly in the telecommunications and
financial services markets
(4) the impact of new product introductions by us and our competitors
(5) our unwillingness to significantly lower prices to meet prices set by
our competitors
(6) the effect of publications of opinions about us and our competitors and
their respective products
(7) customer order deferrals in anticipation of product enhancements or new
product offerings by us or our competitors
(8) potential customers unwillingness to invest in our products given our
financial instability
A number of other factors make it impossible to predict our operating
results for any period prior to the end of that period. We ship our software to
a customer at receipt of the customer's order, and consequently, we have little
order backlog. As a result, license revenue in any quarter is substantially
dependent on orders booked and shipped in that quarter. Historically, we record
most of our revenue and book most of our orders in the third month of each
quarter, with a concentration of such revenue and orders in the last few days of
the quarter. We expect this trend to continue. Many of these factors are beyond
our control.
We may not be able to manage costs given the unpredictability of our
revenue. We expended significant resources in 1997 and 1998 to build our
infrastructure and hire personnel, before reductions, particularly in the
services and sales and marketing sectors, in expectation of higher revenue
growth than actually occurred. Although we have restructured our operations to
reduce operating expenses in 1999, we continue to plan for revenue growth in
2000 compared to 1999. Consequently, we will continue to incur a relatively high
level of fixed expenses. Although, in January 1999, we reduced significantly our
worldwide headcount and implemented controls on spending in order to achieve
expense reductions, if expense controls are not maintained or planned revenue
growth does not materialize, our business, financial condition and results of
operations will be materially harmed.
We rely on our core markets, specifically the telecommunications and
financial services markets characterized by complexity and intense competition.
Historically, we have been highly dependent upon the telecommunications industry
and are becoming increasingly dependent upon the financial services market. Our
success in the telecommunications and financial service markets is dependent, in
part, on our ability to compete with alternative technology providers and on
whether our customers and potential customers believe we have the expertise
necessary to provide effective solutions in these markets. If these conditions,
among others, are not satisfied, we may not be
26
<PAGE>
successful in generating additional opportunities in these markets. The need for
and type of applications and commercial products for the telecommunications and
financial services markets is continuing to develop, is rapidly changing, and is
characterized by an increasing number of new entrants whose products may compete
with those of ours. As a result, we cannot predict the future growth of these
markets, and demand for object-oriented databases in these markets may not
develop or be sustainable. We also may not be successful in attaining a
significant share of these markets. In addition, organizations in these markets
generally develop sophisticated and complex applications that require
substantial customization of our products. Although we seek to generate
consulting revenue in connection with these customization efforts, we have
offered, and may, under certain circumstances continue to offer, free or reduced
price consulting. This practice has impacted, and will continue to impact, our
service margins and will require that we maintain a highly skilled service
infrastructure with specific expertise in these markets.
Our products have a lengthy sales cycle. Our sales cycle, which varies
substantially from customer to customer, often exceeds nine months and can
sometimes extend to a year or more. Due in part to the strategic nature of our
products and associated expenditures, potential customers are typically cautious
in making product acquisition decisions. The decision to license our products
generally requires us to provide a significant level of education to prospective
customers regarding the uses and benefits of our products, and we must
frequently commit no-fee pre-sales support resources, such as assistance in
performing bench marking and application prototype development. Because of the
lengthy sales cycle and the relatively large average dollar size of individual
licenses, a lost or delayed sale could have a significant impact on our
operating results for a particular period. Although we seek to develop
relationships with best-of-class value-added resellers in the telecommunications
and financial services markets in order to strengthen our indirect sales
activity, we have not yet entered into such relationships and may not be
successful in developing such relationships. In addition, our value-added
resellers may be subject to a lengthy sales cycle for our products.
Our customer concentration increases the potential volatility of our
operating results. Notwithstanding our recent efforts to develop new customers,
typically through the use of relatively small licenses, a significant portion of
our total revenue has been, and we believe will continue to be, derived from a
limited number of orders placed by large organizations. The timing of such
orders and their fulfillment has caused, and is likely to cause in the future,
material fluctuations in our operating results, particularly on a quarterly
basis. In addition, our major customers tend to change from year to year. The
loss of any one or more of our major customers or our inability to replace a
customer that has become less significant in a given year with a different major
customer could have a material adverse effect on our business.
We depend on our international operations. A significant portion of our
revenue is derived from customers located outside the United States. This
requires that we operate internationally and maintain a significant presence in
international markets. However, our international operations are subject to a
number of risks. These risks include:
(1) longer receivable collection periods
(2) changes in regulatory requirements
(3) dependence on independent resellers
(4) multiple and conflicting regulations and technology standards
(5) import and export restrictions and tariffs
(6) difficulties and costs of staffing and managing foreign operations
(7) potentially adverse tax consequences
(8) foreign exchange fluctuations
(9) the burdens of complying with a variety of foreign laws
(10) the impact of business cycles and economic instability outside the
United States
We must defend against securities litigation. We and certain of our present
and former officers and directors were named as defendants in four class action
lawsuits filed in the United States District Court for the Northern District of
California, filed on January 26, 1998, February 5, 1998, March 11, 1998 and
March 18, 1998, respectively. On June 19, 1998, a Consolidated Amended Complaint
was filed in the above mentioned court, by the lead Plaintiff named by the
court. The amended complaint alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act, and Securities and Exchange Commission Rule 10b-5
promulgated under the Securities Exchange Act, in connection with public
statements about the Company's expected financial performance. The complaint
seeks an unspecified amount of damages. We vigorously deny the plaintiffs'
claims and has moved to dismiss the allegations. The plaintiff has filed a
response to our motion to dismiss and we have filed an opposition to plaintiff's
response. The motion to dismiss was submitted to the court for consideration on
November 13, 1998 and the court has not yet issued a decision. Securities
27
<PAGE>
litigation can be expensive to defend, consume significant amounts of management
time and result in adverse judgments or settlements that could have a material
adverse effect on the Company's results of operations and financial condition.
Our stock price is volatile. Our revenue, operating results and stock price
have been and may continue to be subject to significant volatility, particularly
on a quarterly basis. We have previously experienced significant shortfalls in
revenue and earnings from levels expected by securities analysts and investors,
which has had an immediate and significant adverse effect on the trading price
of our common stock. This may occur again in the future. Additionally, as a
significant portion of our revenue often occurs late in the quarter, we may not
learn of revenue shortfalls until late in the quarter, which could result in an
even more immediate and adverse effect on the trading price of our common stock.
Stock ownership has become more concentrated and subject to dilution. As a
result of the Vertex note conversion and equity financing in July 1999,
ownership of our equity has become more concentrated. Based on Vertex's filings
with the SEC and assuming, as of December 31, 1999, 15,030,330 shares
outstanding (assuming conversion of all outstanding preferred stock and exercise
of all warrants outstanding), Vertex and its affiliates would own approximately
26.6% of our common stock if it converted all of its Preferred Stock and
exercised all of its warrants. The Company has registered 5,839,091 shares
issuable upon conversion/exercise of the outstanding preferred stock and
warrants. The issuance of such shares could result in the dilution of other
shareholders, and the sale of such shares could depress the market price of our
stock.
Our business may be harmed by Year 2000 problems. We and our customers and
suppliers are aware and concerned about the risks associated with Year 2000
computer issues. Our systems did recognize the correct date when the year
changed to 2000, and our customers, as of the date of this filing, have not
reported any material Y2k related problems, with our ODBMS and related products,
to our service department. There were no material adverse effects on our
operations, either internally or externally. We are also not aware of any
material Y2k problems with our vendors or third party developers.
Despite the foregoing measures, there can be no assurance that Year 2000
problems will not occur and the consequences of any such problems may be
material to the operation of the Company and its financial results or prospects.
Risks Related To Our Industry
We face competition from different sectors.
The competition includes Fortune 500 firms such as Oracle and Sybase with
the resources to heavily promote their products and assert account control over
their largest enterprise accounts. Competition from the traditional ODBMS
vendors has started to shift and shakeout. Most have diverged into new markets
and new businesses, leaving Objectivity and eXcelon as our key competitors.
A more comprehensive list includes competitors offering object and
object-relational database management systems such as Oracle Corporation,
Computer Associates International, Inc., eXcelon (formerly Object Design, Inc.),
Informix and its Illustra Information Technologies, Inc. subsidiary,
Objectivity, Inc., Gemstone Systems, Inc., Poet Software Corporation, ONTOS,
Inc. In addition, our products compete with traditional relational database
management systems, many of which have been or are expected to be modified to
incorporate object-oriented interface and other functionality, and to leverage
Java. The principal competitors in the relational database market are Oracle,
Sybase, Informix, IBM and Microsoft. In 1997, Oracle released its Oracle8
product, which, with its object option, provides object-relational database
capabilities, and Computer Associates released their Jasmine ODBMS, which is a
pure object-oriented database. We believe that the decision of relational
database vendors to pursue object-relational or object-oriented approaches
validates our belief that object-oriented database solutions will be
increasingly demanded by today's business organizations. During the last year we
have seen a major shift away from Smalltalk towards JAVA. In addition Versant is
used more and more as a middle tier persistence layer in multi-tier applications
This allows Versant to complement the product offerings from some of the more
established companies in these markets. These are companies like IBM, SUN and
BEA selling Java based tools and solutions. In order for Versant products to be
well accepted in the marketplace, it is important for one or more of these
partnerships to become strategic on both sides. There is also some movement in
the market to buy as much middleware components as possible from one or just a
few suppliers. Due to the introduction by Oracle and Computer Associates of
competing products with lower prices than the Versant ODBMS, we
28
<PAGE>
may not be able to maintain prices for our products at levels that will enable
us to market our products profitably. Any decrease in per unit prices, as a
result of competition or otherwise, could have a material adverse effect on our
business, operating results and financial condition.
We are also indirectly facing competition from developers of middleware
products that allow users to connect object-oriented applications to existing
legacy data and RDBMSs such as TopLink and Thought Inc.
Many of our competitors, and especially Oracle and Computer Associates,
have longer operating histories, significantly greater financial, technical,
marketing, service and other resources, significantly greater name recognition,
broader product offerings and a larger installed base of customers than ours. In
addition, many of our competitors have well-established relationships with
current and potential customers of ours. As a result, our competitors may be
able to devote greater resources to the development, promotion and sale of their
products, may have more direct access to corporate decision-makers based on
previous relationships and may be able to respond more quickly to new or
emerging technologies and changes in customer requirements. We may not be able
to compete successfully against current or future competitors, and competitive
pressures could have a material adverse effect on our business, operating
results and financial condition.
We depend on successful technology development. We believe that significant
research and development expenditures will be necessary to remain competitive.
While we believe our research and development expenditures will improve the
Versant product lines, due to the uncertainty of software development projects,
these expenditures will not necessarily result in successful product
introductions. Uncertainties impacting the success of software development
project introductions include technical difficulties, market conditions,
competitive products and consumer acceptance of new products and operating
systems.
We also face certain challenges in integrating third-party technology with
our products. These challenges include the technological challenges of
integration, which may result in development delays, and uncertainty regarding
the economic terms of our relationship with the third-party technology provider,
which may result in delays of the commercial release of new products.
We face further technology development challenges associated with our
acquisition of Soft Mountain. The Soft Mountain R'Net product offering is still
under development, and there is uncertainty in both the timing of the release
and the market acceptance of the product.
We have worked with BEA and IBM to develop technology that will allow the
Versant Enterprise Container to support the BEA WebLogic and IBM WebSphere
application server family, undiscovered bugs or errors may exist that prevent us
from achieving the functionality we seek with the Versant Enterprise Container.
In addition, because Java Bean containers are specific to each application
server vendor and no standards have been adopted for such containers, we may not
be able to take advantage of our development work with the BEA and IBM
application server family's when developing solutions for other application
server vendors. We do not currently have any agreements or relationships
regarding the Versant Enterprise Container with other application server
vendors, therefore customers will only be able to use it with BEA and/or IBM
application servers.
We must protect our intellectual property. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy aspects of our
products, obtain or use information that we regard as proprietary or use or make
copies of our products in violation of license agreements. Policing unauthorized
use of our products is difficult. In addition, the laws of many jurisdictions do
not protect our proprietary rights to as great an extent as do the laws of the
United States. Shrink-wrap licenses may be wholly or partially unenforceable
under the laws of certain jurisdictions, and copyright and trade secret
protection for software may be unavailable in certain foreign countries. Our
means of protecting our proprietary rights may not be adequate, and our
competitors may independently develop similar technology.
To date, we have not been notified that our products infringe the
proprietary rights of third parties, but third parties could claim that our
current or future products infringe such rights. We expect that developers of
object-oriented technology will increasingly be subject to infringement claims
as the number of products, competitors and patents in our industry segment
grows. Any such claim, whether meritorious or not, could be time-consuming,
result in costly litigation, cause product shipment delays or require us to
enter into royalty or licensing agreements. Such royalty or
29
<PAGE>
licensing agreements might not be available on terms acceptable to us or at all,
which could have a material adverse effect upon our business, operating results
and financial condition.
Our future success will depend in part on our ability to integrate our
products with those of vendors providing complementary products. The Versant
ODBMS must be integrated with compilers, development tools, operating systems
and other software and hardware components to produce a complete end-user
solution. We may not receive the support of these third-party vendors, some of
which may compete with us, to integrate our products with the vendors' products.
We depend on our personnel for whom competition is intense. Our future
performance depends in significant part upon the continued service of our key
technical, sales and senior management personnel. The loss of the services of
one or more of our key employees could have a material adverse effect on our
business. Our future success also depends on our continuing ability to attract,
train and motivate highly qualified technical, sales and managerial personnel.
Competition for such personnel is intense, especially in Silicon Valley where
our headquarters are located, and we may not be able to attract, train and
motivate such personnel.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relate primarily
to our investment portfolio. Currently, we do not use derivative financial
instruments in our investment portfolio. We invest in high-credit quality
issuers and, by policy, limits the amount of principal exposure to any one
issuer. As stated in our policy, we seek to ensure the safety and preservation
of our invested principal funds by limiting default and market risk.
We seek to mitigate default risk by investing in high-credit quality
securities and by positioning our investment portfolio to respond to a
significant reduction in a credit rating of any investment issuer, guarantor or
depository. We seek to mitigate market risk by limiting the principal and
investment term of funds held with any one issuer and by investing funds in
marketable securities with active secondary or resale markets.
As of December 31, 1999 we had invested all our excess funds in current
money market accounts and had no fixed term investments to report.
Item 8. Financial Statements
The financial statements and supplementary data required by Item 8 are set
forth below on pages F-1 to F-20 of this report.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
30
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant; Compliance with
Section 16(a) of the Exchange Act.
The information concerning our directors required by this Item is
incorporated by reference to our definitive proxy statement for our 2000 annual
meeting of shareholders, which we will file with the Securities and Exchange
Commission by April 11, 2000, under the heading "Election of Directors." The
information concerning our executive officers required by this item is
incorporated by reference to the proxy statement under the heading "Executive
Officers."
The section entitled "Compliance under Section 16(a) of the Securities
Exchange Act of 1934" that will appear in our proxy statement sets forth the
information concerning compliance by our officers, directors and 10%
shareholders with Section 16 of the Securities Exchange Act and is incorporated
herein by reference.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to our
proxy statement under the heading "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to our
proxy statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to our
proxy statement under the heading "Certain Relationships and Related
Transactions."
Item 14. Other Information.
On October 21, 1999, the board of directors added Mr. Hank Delevati to the
board. Mr. Delevati has been the Senior Vice President of Information Technology
and CIO with Aspect Communications, a provider of telecommunications equipment
and application software since August 1999. Prior to Aspect Mr. Delevati was the
CIO of Quantum Corporation from 1995 to 1999, CIO of Borland Corporation from
1994 to 1995 and the CIO of Logitech from 1993 to 1994, Between 1987 and 1993
Mr. Delevati worked with Sun Microsystems as their Director - Applications
Development & Global Information Resources. Mr. Delevati received his Bachelor
of Science in Computer Sciences from Arizona State University. Mr. Delevati is
also a director of Insite Objects.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits.
See Exhibit Index, page X-1.
(b) Reports on Form 8-K filed in quarter ending December 31, 1999.
With the exception of the information incorporated herein by reference to
our proxy statement in Items 9, 10, 11 and 12 of Part III, the proxy statement
is not deemed to be filed with this Form 10-KSB.
31
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Fremont, State of California, on this 30th day of
March, 2000.
VERSANT CORPORATION
By:/s/ Gary Rhea
-----------------------------------
Gary Rhea
Vice President-Finance and Administration
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
PRINCIPAL EXECUTIVE OFFICER:
<S> <C> <C>
/s/ Nick Ordon President, Chief March 27, 2000
--------------------------------------
Nick Ordon Executive Officer and
Director
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Gary Rhea Vice President-Finance March 27, 2000
--------------------------------------
Gary Rhea and Administration
ADDITIONAL DIRECTORS:
/s/ Mark Leslie Director March 24, 2000
--------------------------------------
Mark Leslie
/s/ Stephen J. Gaal Director March 25, 2000
--------------------------------------
Stephen J. Gaal
/s/ Bernhard Woebker Director March 25, 2000
--------------------------------------
Bernhard Woebker
/s/ Hank Delevati Director March 24, 2000
--------------------------------------
Hank Delevati
/s/ David Banks Director March 25, 2000
--------------------------------------
David Banks
</TABLE>
32
<PAGE>
VERSANT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
------------------
<S> <C>
Report of Independent Public Accountants............................. F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit)............ F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7 to F-19
Schedule II - Valuation and Qualifying Accounts and Reserves......... F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Versant Corporation:
We have audited the accompanying consolidated balance sheets of Versant
Corporation (a California corporation) and its subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years ended
December 31, 1999. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Versant Corporation
and its subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule appearing on
page F-20 is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 25, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
VERSANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
--------------------------------
1999 1998
------------- -------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,663 $ 3,564
Accounts receivable, net of allowance for doubtful
accounts of $414 and $335 in 1999 and 1998, respectively 7,278 5,878
Other current assets 753 1,318
--------- ---------
Total current assets 11,694
10,760
Property and equipment, net 5,478
7,381
Other assets 190 433
Excess of cost of investment over fair value of net assets acquired,
net of accumulated amortization of $2,917 and $2,473 in 1999 and
1998, respectively 1,879 2,095
--------- ---------
$ 19,241 $ 20,669
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 253 $ 561
Current maturities of long-term debt 1,240 2,223
Short term debt 1,400 2,426
Accounts payable 718 2,331
Accrued liabilities 3,405 3,692
Deferred revenue 3,094 2,830
--------- ---------
Total current liabilities 10,110 14,063
--------- ---------
Long-term liabilities, net of current portion:
Capital lease obligations 127 369
Long term debt - 3,678
Deferred revenue 416 704
Shareholders' equity:
Preferred stock
Authorized - 3,000 shares
Issued and outstanding--1,490 in 1999 and none in 1998 5,662 -
Liquidation value of $9,520
Common stock:
Authorized - 30,000 shares
Issued and outstanding--10,561 in 1999 and 10,150 in 1998 48,528 45,727
Accumulated deficit (45,627) (43,890)
Accumulated other comprehensive income 25 18
--------- ---------
Total shareholders' equity 8,588 1,855
--------- ---------
$ 19,241 $ 20,669
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
VERSANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------- ------------- -------------
Revenue:
<S> <C> <C> <C>
License $ 17,074 $ 14,463 $ 21,363
Services
8,794 8,770 7,827
------------- -------------- -------------
Total revenue 25,868 23,233 29,190
Cost of revenue:
License 745 2,846 1,445
Services 4,180 6,893 5,010
------------- -------------- -------------
Total cost of revenue 4,925 9,739 6,455
------------- -------------- -------------
Gross profit 20,943 13,494 22,735
Operating expenses:
Marketing and sales 9,883 18,511 17,265
Research and development 7,011 7,722 5,225
General and administrative, excluding non-cash
compensation expense of $337,000 in 1999 shown
below 3,658 3,857 2,880
Amortization of goodwill 463 546 370
Write down of assets - 1,555 -
Acquired in-process R&D cost - 528 -
Non-cash compensation expense 337 - -
------------- -------------- -------------
Total operating expenses 21,352 32,719 25,740
Loss from operations (409) (19,225) (3,005)
------------- -------------- -------------
Other income (expense):
Foreign currency transaction gain (loss) 2 (34) 133
Interest expense (1,294) (640) (162)
Interest and other income (expense), net 19 (18) 734
------------- -------------- -------------
Total other income (expense) (1,273) (692) 705
Loss before taxes (1,682) (19,917) (2,300)
Provision for income taxes 54 18 40
------------- -------------- -------------
Net loss $ (1,736) $ (19,935) $ (2,340)
============= ============== =============
Net loss per share:
Basic ($0.17) ($2.16) ($0.26)
============= ============== =============
Diluted ($0.17) ($2.16) ($0.26)
============= ============== =============
Weighted shares used in per share calculations
Basic 10,178 9,209 8,931
============= ============== ============
Diluted 10,178 9,209 8,931
============= ============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
VERSANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
Preferred Stock Common Stock Accumulated Shareholders'
--------------- ------------
Shares Amount Shares Amount Deficit Equity(Deficit)
--------- -------- ---------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- -- 8,719,207 $ 40,889 $(21,615) $ 19,274
ESPP and exercises of stock options and
warrants -- -- 106,866 946 -- 946
Issuance of common stock to
shareholders of Versant Europe -- -- 167,545 1,145 -- 1,145
Net loss -- -- -- -- (2,340) (2,340)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments -- -- -- -- 275 275
----------- ------------
Comprehensive income -- -- -- -- (2,065) (2,065)
-------- -------- --------- -------- ----------- ------------
Balance at December 31, 1997 -- -- 8,993,618 42,980 (23,680) 19,300
ESPP and exercises of stock options and
warrants -- -- 210,934 734 -- 734
Issuance of common stock to
shareholders of Soft Mountain -- -- 245,586 645 -- 645
Issuance of common stock to Special Situations
Fund -- -- 700,000 1,368 -- 1,368
Net loss -- -- -- -- (19,935) (19,935)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments -- -- -- -- (257) (257)
----------- ------------
Comprehensive loss -- -- -- -- (20,192) (20,192)
-- -- -- -- ----------- ------------
Balance at December 31, 1998 -- -- 10,150,138 45,727 (43,872) 1,855
--------- -------- ---------- -------- ----------- ------------
ESPP and exercises of stock options and
warrants -- -- 380,795 768 -- 768
Issuance of common stock to
shareholders of Soft Mountain -- -- 30,000 148 -- 148
Issuance of preferred stock and warrants to
investors in exchange for cash and notes
payable 1,489,799 5,662 -- 1,548 -- 7,210
Non cash compensation cost associated with the
issuance of warrants for consulting services -- -- -- 337 -- 337
Net loss -- -- -- -- (1,736) (1,736)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments -- -- -- -- 7 7
----------- ------------
Comprehensive income -- -- -- -- (1,729) (1,729)
--------- -------- ---------- -------- ----------- ------------
Balance at December 31, 1999 1,489,799 $ 5,662 10,560,933 $ 48,528 $ (45,602) $ 8,588
========= ======== ========== ======== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
VERSANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------------------
1999 1998 1997
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (1,736) $ (19,935) $ (2,340)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,382 2,716 1,262
Write-off of acquired in-process R&D cost - 528 -
Write down of goodwill - 1,555 -
Non-cash compensation expense 337 - -
Accrued discount/interest on Vertex note conversion 945 - -
Provision for doubtful accounts receivable 155 (857) 208
Changes in current assets and liabilities, net of
acquisitions:
Accounts receivable (1,555) 4,548 (5,030)
Other current assets 565 982 (2,476)
Other assets 243 33 (381)
Accounts payable (1,613) 1,259 597
Accrued liabilities (218) (642) 966
Deferred revenue (24) (815) 1,539
------------ ------------ -----------
Net cash used in operating activities (520) (10,628) (5,655)
------------ ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (35) (1,989) (6,679)
Purchases of short-term investments - - (20,632)
Proceeds from sale and maturities of short-term
investments - 6,114 29,462
Purchase of Versant Europe, net of cash acquired - - (1,987)
Purchase of Versant India (80) - -
Purchase of Soft Mountain, net of cash acquired - (136) -
------------ ------------ -----------
Net cash provided by (used in) investing activities (115) 3,989 164
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 768 2,102 946
Proceeds from sale of preferred stock, net 970 - -
Proceeds from sale of warrants 1,548 - -
Net borrowings(payments) under short term note and bank
loan (2,009) 1,797 735
Principal payments under capital lease obligations (550) (627) (262)
Borrowings(principal payments) under long term bank note - (106) 2,522
Net proceeds from long-term borrowings - 3,320 -
------------ ------------ -----------
Net cash provided by financing activities 727 6,486 3,941
------------ ------------ -----------
Effects of exchange rate changes on cash 7 - -
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 99 (153) (1,550)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,564 3,717 5,267
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,663 3,564 $ 3,717
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 348 $ 378 $ 180
Foreign withholding and state income taxes 54 18 -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations incurred for acquisition of
equipment $ - $ 607 $ 574
Issuance of common stock to shareholders of Versant
Europe - - 1,145
Issuance of common stock to shareholders of Soft
Mountain 148 645 -
Issuance of warrants for consulting services 337 - -
Conversion of notes payable to Series A
Preferred Stock 3,619 - -
Conversion of accrued interest and discount to Series A
Preferred Stock 945
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-6
<PAGE>
VERSANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. Organization, Operations and Liquidity
Versant Corporation was incorporated in California in August 1988.
References to the "Company" in these Notes to Consolidated Financial Statements
refer to Versant Corporation and its subsidiaries. The Company operates in a
single industry segment and is involved in the design, development, marketing
and support of high performance object database management software systems.
The Company is subject to the risks associated with other companies in a
comparable stage of development. These risks include, but are not limited to,
fluctuations in operating results, seasonality, a lengthy sales cycle,
dependence on the acceptance of object database technology, competition, a
limited customer base, dependence on key individuals, product concentration, and
the ability to adequately finance its ongoing operations.
To date, the Company has not achieved business volume sufficient to restore
profitability and positive cash flow on an annual basis. The Company operated at
a net loss of $1.7 million and $19.9 million in 1999 and 1998, respectively. The
Company did achieve positive cash flow from operations in the second half of
1999. Management anticipates funding future operations and repaying its debt
obligations from current cash resources and future cash flows from operations.
If financial results fall short of projections, additional debt or equity may be
required and the Company may need to implement further cost controls. No
assurances can be given that such efforts will be successful, if required.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid cash investments with an original maturity of three
months or less to be cash equivalents. Cash equivalents consist of United States
Government obligations. Investments have been accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Company's investments in
debt securities matured at various dates through March 1998. The fair value of
available-for-sale securities was determined based on quoted market prices at
the reporting date for the instruments.
As of December 31, 1999 and 1998, the Company did not have investments in
securities.
Foreign Currency Translation
The functional currency of each of the Company's subsidiaries is its local
currency. Accordingly, the Company applies the current rate method to translate
the subsidiaries' financial statements into U.S. dollars. Translation
adjustments are included as a separate component of shareholders' equity in the
accompanying consolidated financial statements.
Revenue Recognition
The Company adopted the provisions of Statement of Position (SOP) 97-2,
"Software Revenue Recognition", for transactions entered into after January 1,
1998. Revenue consists mainly of revenue earned under software license
agreements, maintenance agreements and consulting and training activities.
Revenue from perpetual software license agreements is recognized as revenue
upon shipment of the software if there is no significant modification of the
software, payments are due within the Company's normal payment terms and
collection of the resulting receivable is probable. If an acceptance period is
required, revenue is recognized upon the earlier of customer acceptance or the
expiration of the acceptance period.
During 1997 and 1998, the Company entered into contracts with certain of
its customers that require the Company to perform development work in return for
nonrecurring engineering fees. Revenue related to such nonrecurring
F-7
<PAGE>
engineering fees is generally recognized on a percentage of completion basis.
There were no such contracts during 1999.
Maintenance revenue is recognized ratably over the term of the maintenance
contract. Consulting and training revenue is recognized when a customer's
purchase order is received and the services are performed.
Cost of license revenue consists principally of product royalty
obligations, product packaging, freight, users manuals, product media,
production labor costs and reserves for estimated bad debts.
Cost of services revenue consists principally of personnel costs associated
with providing training, consulting, technical support and nonrecurring
engineering work paid for by customers.
Segment Information
In 1998 the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also established standards for related
disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance.
The Company is organized geographically and by line of business. The
Company has three major lines of business operating segments: license, support,
and consulting/training. However, the Company also evaluates certain lines of
business segments by vertical industries as well as by product categories. While
the Executive Management Committee evaluates results in a number of different
ways, the line of business management structure is the primary basis for which
it assesses financial performance and allocates resources.
The license line of business licenses an object oriented database
management software (ODBMS). The ODBMS software can be classified into two broad
categories: systems and development tools. ODBMS enables users to create, store,
retrieve, and modify the various types of data stored in a computer system. The
support line of business provides customers with a wide range of support
services that include on-site support, telephone or internet access to support
personnel, as well as software upgrades. The consulting and training line of
business provides customers with a wide range of consulting and training
services to assist the customer in evaluating, installing and customizing the
database as well as training classes on the use and operation of the Company's
products.
The accounting policies of the line of business operating segments are the
same as those described in the summary of significant accounting policies.
The Company does not track assets by operating segments. Consequently, it
is not practicable to show assets by operating segment.
F-8
<PAGE>
The table below presents a summary of operating segments (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues from Unaffiliated Customers
License $ 17,074 $ 14,463 $ 21,363
Support 5,780 4,428 3,804
Consulting & Training 3,014 4,342 4,023
---------- ---------- ----------
Total Revenue 25,868 23,233 29,190
Distribution Margin
License 16,329 11,617 19,915
Support 4,261 445 264
Consulting & Training 353 1,432 2,556
---------- ---------- ----------
Total Distribution Margin 20,943 13,494 22,735
Profit Reconciliation:
Other Operating Expenses 21,015 32,191 25,740
Acquired In-Process R&D Cost - 528 -
Non-Cash Compensation Expense 337 - -
Other Income (Expense) (1,273) (692) 705
---------- ---------- ----------
Loss Before Provision for Income Taxes $ (1,682) $ (19,917) $ (2,300)
========== ========== ==========
</TABLE>
The table below presents the Company's revenues by legal subsidiary (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total Revenues Attributable To:
United States $ 13,287 $ 13,280 $ 22,149
Germany 4,243 3,663 4,627
France 3,822 2,659 1,356
United Kingdom 3,568 2,411 354
Australia 948 1,220 704
-------- -------- --------
Total $ 25,868 $ 23,233 $ 29,190
======== ======== ========
</TABLE>
Property and Equipment
Property and equipment, at cost, consisted of the following (in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Computer equipment $ 9,066 $ 8,574
Furniture and fixtures 2,092 2,110
Software 1,165 1,138
Leasehold improvements 1,316 1,782
-------- --------
13,639 13,604
Less--Accumulated depreciation and amortization (8,161) (6,223)
-------- --------
$ 5,478 $ 7,381
======== ========
</TABLE>
The Company has entered into capital lease agreements for equipment with an
original cost of $1,856,000, $1,856,000 and $1,199,000 at December 31, 1999,
1998 and 1997, respectively. Accumulated depreciation of leased equipment was
$1,446,000, $926,000 and $249,000 at December 31, 1999, 1998 and 1997,
respectively.
Depreciation and Amortization
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets of three to ten years. Leased assets are
amortized over the shorter of the estimated useful life or the lease term.
F-9
<PAGE>
Amortization of Excess Cost of Assets Acquired
Amortization of excess of cost of investment over fair value of assets
acquired related to the Company's acquisitions. The goodwill associated with the
acquisition of Versant Europe in 1997 (see note 9) was being recognized on a
straight-line basis over seven years, but this estimate was changed in 1998 to a
five year period. The goodwill associated with the acquisition of Soft Mountain
is recognized over five years (see note 10).
Software Development Costs
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility. The Company has defined the establishment of technological
feasibility as the completion of a working model. Amounts capitalizable to date
under the provisions of SFAS No. 86 have not been material.
Deferred Revenue
Deferred revenue represents amounts received from customers under certain
license, maintenance and nonrecurring engineering agreements for which the
revenue earnings process has not been completed.
Deferred revenue consisted of the following components (in thousands):
December 31,
----------------
1999 1998
------- -------
Maintenance $ 3,395 $ 3,160
Development work 30 39
Training and consulting 85 335
------- -------
$ 3,510 $ 3,534
======= =======
Accrued Liabilities
Accrued liabilities consisted of the following components (in thousands):
December 31,
----------------
1999 1998
------- -------
Payroll and related $ 1,676 $ 1,869
Taxes payable 968 851
Other 761 972
------- -------
$ 3,405 $ 3,692
======= =======
Significant Customers
The Company had no sales to customers representing more than 10% of total
revenue in 1999 and 1998. In 1997 two customers accounted for $5.8 million and
$3.1 million in revenue, respectively.
International Sales
International sales, consisting of sales to customers in foreign countries,
were $12.7 million, $10.5 million and $8.6 million of total revenue in 1999,
1998 and 1997, respectively.
International sales by country or region were as follows (in thousands):
Year Ended December 31,
-----------------------------------
1999 1998 1997
-------- -------- -------
Europe $ 11,633 $ 8,733 $ 6,337
Canada 74 286 1,163
Australia 398 825 603
Japan 530 226 361
Other 21 417 106
-------- -------- -------
$ 12,656 $ 10,487 $ 8,570
======== ======== =======
F-10
<PAGE>
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable and
short-term investments. Credit is extended based on an evaluation of the
customer's financial condition, and generally collateral is not required. As of
December 31, 1999, approximately 26% of accounts receivable were concentrated
with three customers. Also 30%, 42% and 39% of our total revenue in 1999, 1998
and 1997, respectively, were attributable to sales of products to
telecommunications companies. The Company generally does not require collateral
on accounts receivable because the majority of the Company's customers are
large, well established companies. The Company provides reserves for estimated
credit losses in accordance with management's ongoing evaluation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Net Loss Per Share
The Company adopted SFAS No. 128, "Earnings per Share", effective December
15, 1997. This standard revised certain methodology for computing net income
(loss) per share and requires the reporting of two net income (loss) per share
figures: basic net income (loss) per share and diluted net income (loss) per
share. Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares outstanding. Diluted net income
(loss) per share is computed by dividing net income (loss) by the sum of the
weighted average number of shares outstanding plus the dilutive effect of shares
issuable through the exercise of stock options. The dilutive effect of stock
options is computed using the treasury stock method, and the dilutive effect of
convertible preferred stock is computed using the if converted method. Dilutive
securities are excluded from the diluted net income (loss) per share computation
if their effect is antidilutive.
The reconciliation of the numerators and denominators of the basic and
diluted net loss per share computations is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
<S> <C> <C> <C>
FOR THE YEAR ENDED 1997:
Basic and diluted net loss per share:
Losses attributable to holders of common stock $ (2,340) 8,931 $ (0.26)
========== ====== ========
FOR THE YEAR ENDED 1998:
Basic and diluted net loss per share:
Losses attributable to holders of common stock $ (19,935) 9,209 $ (2.16)
========== ====== ========
FOR THE YEAR ENDED 1999:
Basic and diluted net loss per share:
Losses attributable to holders of common stock $ (1,736) 10,178 $ (0.17)
========= ====== ========
</TABLE>
The diluted net loss per share for the years ended 1999, 1998 and 1997 was
the same as basic net loss per share due to losses in these periods and thus the
inclusion of potential common shares would have been antidilutive.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to amounts in prior years to
conform to the 1999 presentation.
F-11
<PAGE>
3. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which requires
companies to value derivative financial instruments, including those used for
hedging foreign currency exposures, at current market value with the impact of
any change in market value being charged against earnings in each period. In
June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133" to defer the effective date of SFAS No. 133
until fiscal years beginning after June 15, 2000. To date, the Company has not
entered into any derivative financial instrument contracts. Thus the Company
anticipates that SFAS No. 133 will not have a material impact on its
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements".
SAB 101 provides guidance on applying generally accepted accounting principles
to revenue recognition issues in financial statements. We will adopt SAB 101 as
required in the second quarter of 2000. We do not expect the adoption of SAB 101
to have a material impact on our consolidated results of operations and
financial position.
4. Lease Obligations
In November 1996, the Company entered into an agreement to lease its new
corporate headquarters facility under a ten-year operating lease agreement
commencing on June 1, 1997 and expiring on May 31, 2007. The terms of the lease
provide for certain increases in rental payments during the lease term. Rental
expense under this agreement is recognized on a straight-line basis. The Company
also leases field office space in Europe and India, generally under multi-year
operating lease agreements. Consolidated rent expense for 1999, 1998 and 1997
was approximately $1,743,000, $2,043,000 and $1,358,000, respectively.
The future annual minimum lease payments at December 31, 1999 under
non-cancelable operating leases were as follows (in thousands):
Year Amount
---- --------
2000 $ 1,538
2001 1,555
2002 1,529
2003 1,510
2004 1,534
Thereafter 4,604
--------
$ 12,270
The future minimum lease payments required under these capital leases at
December 31, 1999 were as follows (in thousands):
Year Amount
---- ------
2000 $ 297
2001 72
2002 42
------
Minimum lease payments 411
Less--amount representing interest (7 1/2%-14.7%) 31
------
Present value of net minimum lease payments 380
Current maturities 253
------
Long term maturities $ 127
======
5. Line of Credit
The Company maintains a revolving credit line with a bank that expires on
September 30, 2000. The maximum amount that can be borrowed under the revolving
credit line is $5.0 million. As of December 31, 1999, $900,000 was allocated to
a standby letter of credit to support the Company's European banking line and
$1.4 million of borrowings were outstanding. Borrowings and the standby letter
of credit under the revolving credit line are limited to 80% of eligible
accounts receivable and are secured by substantially all of the Company's
assets. These borrowings bear
F-12
<PAGE>
interest at the bank's base lending rate (8.50%, at December 31, 1999 plus
2.0%). The loan agreement contains financial covenants, commencing with quarter
ended December 31, 1999, and also prohibits cash dividends and mergers and
acquisitions without the bank's prior approval. Certain of these covenants,
which the Company was not in compliance with as of December 31, 1999, have been
waived through March 31, 2000. In March 2000 the Company negotiated new
covenants for the year ending December 31, 2000, based on the Company's
forecasted performance in 2000.
On March 19, 1998, the Company converted an interest only, variable rate
note to a variable rate, term loan with principal and interest payable over 36
months. The term loan covenants and interest rate were amended in conjunction
with the new line of credit agreement in March 1998. Borrowings under the loan
are secured by on all assets acquired using the proceeds of the loan, which have
been used for the acquisition of equipment and leasehold improvements. The loan
bears interest at the bank's base lending rate (8.50%, at December 31, 1999 plus
2.5%). The loan contains certain financial covenants and also prohibits cash
dividends and mergers and acquisitions without the bank's prior approval.
Certain of these covenants, which the Company was not in compliance with as of
December 31, 1999, have been waived through March 31, 2000. In March 2000 the
Company negotiated new covenants for the year ending December 31, 2000, based on
the Company's forecasted performance in 2000.
6. Common Stock
During 1995, the Company sold shares of Common Stock to employees at $1.00
per share, which represented fair market value on April 22, 1995. These share
issuances were made pursuant to the 1989 Stock Option Plan and such amounts are
included in the option grant and option exercise table in Note 7 below.
In July and August of 1996, the Company completed its initial public
offering of 2,380,500 shares of Common Stock (including an over-allotment option
of 310,500 shares) at $8.00 per share, resulting in net proceeds to the Company
of $14.9 million after offering costs. In May 1996, the Company sold 100,000
shares of Common Stock to the owners of Versant Europe, which at the time was an
independent distributor of the Company's products, at a price of $7.50 per share
for total proceeds to the Company of $750,000.
In September 1998 in connection with the Company's acquisition of Soft
Mountain, the Company agreed to register the 245,586 shares issued in such
transaction with the SEC on Form S-3 by December 31, 1998 (see Note 10). The
selling shareholders of the Soft Mountain shares demanded that the Company
repurchase for approximately $1.1 million these 245,586 shares due to delays in
the registration of such shares. The Company disputed the right of such
shareholders to receive such payment, however, the Company agreed to issue an
additional 30,000 shares of common stock, with a value of $148,000. This
additional amount was treated as additional purchase price and capitalized as
additional goodwill and will be amortized equally over the remaining four years
of goodwill amortization.
In December 1998, in connection with the sale of shares of common stock to
Special Situations Fund, the Company issued warrants to purchase an additional
350,000 shares. In 1999, Special Situation Fund exercised its warrants to
purchase the 350,000 shares of Common Stock for a total purchase price of
$787,500.
7. Stock Option and Stock Purchase Plans
1996 Equity Incentive Plan
In May 1996, the Board adopted the 1996 Equity Incentive Plan (the "1996
Equity Plan") and the Company's shareholders approved the 1996 Equity Plan in
June 1996. The 1996 Equity Plan serves as the successor equity incentive program
to the Company's 1989 Stock Option Plan. The 1996 Equity Plan provides for the
grant of stock options and stock bonuses and the issuance of restricted stock by
the Company to its employees, officers, directors, consultants, independent
contractors and advisors. Options granted under the 1989 Stock Option Plan
before its termination remain outstanding in accordance with their terms, but no
further options have been granted under the 1989 Stock Option Plan since the
Company's initial public offering. Any authorized shares that are not issued or
subject to outstanding grants under the 1989 Stock Option Plan will be available
for grant and issuance in connection with future awards under the 1996 Equity
Plan. As of December 31, 1999, the Company has authorized 1,900,000 shares of
Common Stock, plus any shares previously issuable under the 1989 Option Plan and
now issuable under the 1996 Equity Plan, for issuance under the 1996 Equity
Plan. As of December 31, 1999, options to purchase 2,261,280 shares were
F-13
<PAGE>
outstanding under the 1996 Equity Plan, options to purchase 9,000 shares had
been exercised under the 1996 Equity Plan, and 152,944 shares were available for
grant under the 1996 Equity Plan, including shares previously available for
grant under the 1989 Stock Option Plan. At December 31, 1999, options to
purchase 770,637 shares were exercisable under the 1996 Equity Plan.
1996 Directors Stock Option Plan
In May 1996, the Board adopted the 1996 Directors Stock Option Plan (the
"Directors Plan") and the Company's shareholders approved the Directors Plan in
June 1996. The Directors Plan provides for the grant of nonqualified stock
options to non-employee directors of the Company, including automatic grants of
options to purchase 10,000 shares of Common Stock to non-employee directors that
were granted concurrently with the initial public offering, an option to new
non-employee directors to purchase 10,000 shares of Common Stock on the date on
which the new director joins the Board and an additional option to purchase
5,000 shares of Common Stock to each eligible director on each anniversary date
of such director's initial option grant under the Directors Plan if such
director has served continuously as a member of the Board since the date such
director was first granted an option under the Directors Plan. The exercise
price of all options granted under the Directors Plan will be the fair market
value of the Common Stock on the date of grant. All options issued under the
Directors Plan will vest as to 50% of the shares on each of the first two
anniversaries following the date of grant, provided the optionee continues as a
member of the Board or as a consultant to the Company. As of December 31, 1999,
the Company has authorized 125,000 shares of Common Stock for issuance under the
Directors Plan. At December 31, 1999, options for an aggregate of 92,500 shares
were outstanding, and options to purchase 57,500 shares were exercisable.
1989 Stock Option Plan
The 1989 Stock Option Plan was succeeded by the 1996 Equity Plan during
1996. Under the provisions of the 1989 Stock Option Plan, the Board of Directors
granted either incentive or non-statutory stock options to employees,
consultants, directors and officers to purchase Common Stock at an exercise
price of not less than 100% of the fair value (as determined by the Board of
Directors) of the shares on the date of grant, except that non-statutory options
were granted at 85% of such fair value. Options expire no later than ten years
from the date of grant and generally vest over a period of 5 years. As of
December 31, 1999, options to purchase 63,700 shares were outstanding under the
1989 Stock Option Plan, options to purchase 1,579,927 shares had been exercised
under the 1989 Stock Option Plan, and no shares were available for grant under
the 1989 Stock Option Plan. As of December 31, 1999, options to purchase 54,176
shares were exercisable under the 1989 Stock Option Plan.
Reserved for Future Issuance
As of December 31, 1999, the Company had reserved shares of Common Stock
for the following purposes:
Employee stock purchase plan 325,017
Stock options available for grant 185,444
Exercise of stock options outstanding 2,417,480
---------
2,927,941
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its option plans. Accordingly, no compensation cost has been
recognized for its option plans. Had compensation cost for the Company's option
plans been determined based on the fair value at the grant dates for the awards
calculated in accordance with SFAS No. 123, the Company's net loss and net loss
per share would have been reduced to the pro forma amounts indicated below (in
thousands except for per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
--------- ----------- ---------
<S> <C> <C> <C>
Net loss As Reported $ (1,736) $ (19,935) $ (2,340)
Pro forma $ (3,709) $ (21,987) $ (3,750)
Basic net loss per share As Reported $ (.17) $ (2.16) $ (0.26)
Pro forma $ (.36) $ (2.39) $ (0.42)
Diluted net loss per share As Reported $ (.17) $ (2.16) $ (0.26)
Pro forma $ (.36) $ (2.39) $ (0.42)
</TABLE>
F-14
<PAGE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Risk free interest rate 5.6% 5.1% 6.1%
Dividend yield 0% 0% 0%
Volatility 80% 80% 60%
Expected life 3 years 3 years 3 years
Weighted average fair value of options granted $1.22 $2.69 $4.99
</TABLE>
Option activity under all of the Company's 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, 1996 744,040 765,528 $ 5.48
Authorized 850,000 -- --
Granted (1,194,215) 1,194,215 11.71
Exercised -- (69,424) 2.28
Repurchased 89,480 -- 0.90
Canceled 555,268 (555,268) 13.20
----------- ----------- ---------
Balance at December 31, 1997 1,044,573 1,335,051 $ 8.01
Authorized -- -- --
Granted (1,112,700) 1,112,700 4.84
Exercised -- (27,257) 1.42
Repurchased 7,033 -- 1.23
Canceled 381,445 (381,445) 7.59
----------- ----------- ---------
Balance at December 31, 1998 320,351 2,039,049 $ 6.45
Authorized 250,000 -- --
Granted (1,534,450) 1,534,450 2.20
Exercised -- (62,990) 0.88
Repurchased 56,378 -- --
Canceled 1,093,029 (1,093,029) 6.68
----------- ----------- ---------
Balance at December 31, 1999 185,308 2,417,480 $ 3.79
=========== =========== =========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1999.
<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 1999 Contractual Life Price 1999 Exercise Price
----------------- ----------------- ------------------ ----------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
From $ 0.25 to $ 2.00 699,919 8.82 $ 1.33 275,891 $ 1.39
From $ 2.22 to $ 4.00 893,700 9.65 2.78 103,746 2.66
From $ 4.75 to $ 6.88 636,716 8.02 5.86 362,340 5.82
From $ 7.25 to $ 10.00 137,539 7.22 8.11 106,869 7.85
From $ 18.00 to $ 18.75 49,606 7.40 18.13 33,467 18.15
--------- ---- ------ ------- ------
From $ 0.25 to $ 18.75 2,417,480 8.79 $ 3.79 882,313 $ 3.74
========= ==== ====== ======= ======
</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 650,000 shares of Common Stock for issuance
under the Purchase Plan. The Purchase Plan will enable eligible employees to
purchase common stock at 85% of the lower of the fair market value of the
Company's Common Stock on the first or the last day of each offering period. As
of December 31, 1999, 324,983 shares had been issued.
On November 1, 1999, the Company signed an agreement with a public
relations firm, whereby the firm provided certain public relations services for
the Company. The Company agreed to compensate the firm for services rendered at
a monthly rate of $5,000 per month and as further compensation the Company
issued warrants to purchase up to 125,000 shares of the Company's common stock.
Warrants for 25,000 shares vested immediately and have an exercise price of
F-15
<PAGE>
$3.00 per share. The remaining warrants for up to 100,000 shares were scheduled
to vest in November 2003 with an exercise price of $10.00 per share unless
certain target stock prices were achieved. If target stock prices were achieved,
the exercise price of the warrants would be adjusted and vesting accelerated.
The public relations firm achieved a majority of its performance criteria during
the fourth quarter of 1999. As a result, the warrants were valued using the
Black-Scholes valuation model at the dates when the performance criteria were
met. The Company recorded $337,000 to general and administrative expense in 1999
related to the warrants. As of December 31, 1999, warrants for 75,000 of the
100,000 shares had vested and the exercise prices were reduced to a weighted
average of $4.50 per vested share. These warrants expire in November 2002.
8. Income Taxes
The Company accounts for income taxes pursuant to the provisions of SFAS
No. 109, "Accounting for Income Taxes," which requires an asset and liability
approach to accounting for income taxes. The Company incurred net operating
losses in 1999, 1998 and 1997 and consequently paid no federal or state taxes
based on income. The Company did pay foreign withholding taxes during those
periods.
The provision for income taxes consisted of the following components (in
thousands):
December 31,
----------------------
1999 1998 1997
------ ------ ------
Current:
Federal $-- $-- $--
State -- -- --
Foreign withholding 54 18 40
------ ------ ------
Total current 54 18 40
Deferred:
Federal -- -- --
State -- -- --
------ ------ ------
Total deferred -- -- --
Total provision for income taxes $54 $18 $40
====== ====== ======
The provision for income taxes differs from the amount estimated by
applying the statutory federal income tax rate to income (loss) before income
taxes as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1999 1998 1997
--------- ----------- ---------
<S> <C> <C> <C>
Benefit computed at federal statutory rate $ (218) $(5,134) $ (805)
State income taxes, net of federal benefit -- -- --
Change in valuation allowance 218 5,134 805
Other 54 18 40
--------- ----------- ---------
Provisions for income taxes $ 54 $ 18 $ 40
--------- ----------- ---------
Effective tax rate -- -- --
</TABLE>
The components of the net deferred tax asset were as follows (in
thousands):
December 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
Deferred tax asset:
Net operating loss carryforwards $ 12,246 $ 12,782 $ 7,954
Tax credit carryforwards 2,408 2,259 1,556
--------- --------- ---------
Other 731 126 523
15,385 15,167 10,033
Valuation allowance (15,385) (15,167) (10,033)
--------- --------- ---------
Net deferred tax asset $ -- $ -- $ --
========= ========= =========
F-16
<PAGE>
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of $33.6 million and $8.4 million, respectively, and tax credit
carryforwards of $2.4 million, expiring on various dates through 2019. Due to
the Company's history of operating losses through 1995, and in 1997, 1998 and
1999 and other factors, the Company believes that there is sufficient
uncertainty regarding the realizability of these carryforwards, and therefore a
valuation allowance of approximately $15.4 million has been recorded against the
Company's net deferred tax assets of approximately $15.4 million. Management
will continue to assess the realizability of the tax benefits available to the
Company based on actual and forecasted operating results.
9. Acquisition of Versant Europe
On March 26, 1997, the Company acquired Versant Europe, an independently
owned distributor of the Company's products in Europe. The Company paid $3.6
million to the shareholder of Versant Europe consisting of $2.0 million in cash
and 167,545 shares of Common Stock valued at $9.75 per share. The acquisition
was accounted for using the purchase method of accounting. Accordingly, the
results of operations of Versant Europe are reflected in the consolidated
financial statements commencing on the date of the acquisition.
The acquisition of Versant Europe resulted in the Company recording an
intangible asset representing the cost in excess of fair value of the net assets
acquired in the amount of $3.3 million, which is being amortized over a
five-year period. The Company also acquired approximately $1.4 million of
prepaid sublicense credits which are being amortized and included in cost of
license revenue in conjunction with associated license revenue transactions
realized by Versant Europe (fully amortized at December 31, 1998). In the fourth
quarter of 1998, the Company determined that the value of its intangible asset
had been impaired due to weaker than anticipated operating results in Europe.
Therefore, the Company recorded a "write-down of asset" charge of $1,555,000
during 1998. This charge represented the shortfall between projected future cash
flows for Europe (as discounted) and the net book value of the intangible asset.
As of December 31, 1998, the Company also changed its estimate of the future
life of the acquired intangible asset from seven to five years.
The table below presents the unaudited pro forma results (in thousands,
except per share data) for the year ended December 31, 1997.
1997
--------
Total revenue $ 29,579
Net loss (2,457)
Pro forma basic and diluted net loss per share ($0.27)
Shares used in computing pro forma loss per share 9,088
10. Acquisition of Soft Mountain
On September 15, 1998, the Company acquired 100% of the outstanding equity
(the "Acquisition") of Soft Mountain S.A. ("Soft Mountain"), a French company.
Soft Mountain develops event-driven middleware software solutions that combine
object orientation and deterministic event processing in a distributed business
system.
The Acquisition was effected pursuant to a Share Purchase Agreement, dated
July 30, 1998 (the "Agreement"), by and between Versant and the shareholders of
Soft Mountain.
Pursuant to the terms of the Agreement, the Company acquired the equity of
Soft Mountain in return for approximately $136,000 in cash and 245,586 shares of
Versant Common Stock, valued at $2.625 and incurred approximately $300,000 in
acquisition expenses. The cash portion of the purchase price was funded by
working capital.
The acquisition of Soft Mountain was accounted for using the purchase
method and resulted in the Company recording an intangible asset representing
the cost in excess of fair market value of the net assets acquired (goodwill) in
the amount of $1.2 million, which is being amortized over a five year period.
The Company wrote off approximately $528,000 of in-process research and
development (IPR&D) costs associated with the purchased software, as the
software had not yet reached technological feasibility and had no alternative
future use. The amount allocated to IPR&D was estimated based upon the stage of
completion of the project, the costs to complete the project, the expected
F-17
<PAGE>
future cash flow, the life cycle of the product ultimately developed and the
associated risks. If the product is not successfully developed the revenue and
profitability of the Company may be adversely affected in future periods. In
November 1999, the Company issued an additional 30,000 shares of Common Stock,
to the original shareholders of Soft Mountain in connection with the
acquisition. This additional cost was added to the original goodwill amount and
is amortized equally over the remaining goodwill period.
The following table presents the unaudited pro forma results assuming that
the Company had acquired Soft Mountain at the beginning of 1997. Net loss per
share has been adjusted to exclude the write-off of acquired in-process research
and development of $528,000 in the twelve month period ended December 31, 1998.
Twelve Months Twelve Months
Ended 12/31/98 Ended 12/31/98
(unaudited) (unaudited)
---------------- ----------------
Revenue 23,460 30,108
Net Loss (20,113) (2,701)
Basic and Diluted Loss Per Share ($2.18) ($0.29)
11. Vertex Note Conversion and Equity Financing
In July 1999, the Company converted $3,846,551 of principal and interest
outstanding under a note payable to Vertex (an investor) into 902,946 shares of
Series A Convertible Preferred Stock (Preferred Stock). The Company had an
initial $846,000 of note discount associated with the Vertex convertible note
requiring the Company to recognize the differential value between market and
below market equity conversion feature as a discount. The discounted value has
been amortized equally over the life of the note, as an interest expense in the
statements of operations. Upon the early conversion of the Note, the balance of
the unamortized discount was charged to interest expense during the third
quarter of 1999. In addition, the Company issued 586,853 shares of Preferred
Stock to a Vertex affiliate and other investors in consideration for $2,499,994.
The holders of Series A Stock will generally vote with the holders of common
stock provided that the Series A Stock is only entitled to a number of votes
equal to 50% of the number of shares of common stock into which the Series A
Stock is convertible. The holders of Series A Stock were also provided with
certain voting protective provisions.
In connection with the issuance of Preferred Stock, the Company issued
warrants to purchase 1,489,799 shares of the Company's Common Stock for cash
consideration of $73,357. The warrants have an exercise price of $2.13 per
share, are immediately exercisable and expire upon the earlier of:
(1) July 11, 2004,
(2) an acquisition of the Company (whether by merger, consolidation, tender
offer or otherwise) in which the Company's shareholders prior to the
acquisition own less than a majority of the surviving corporation, or
the sale of all or substantially all of the Company's assets, or
(3) 15 business days after the Company gives notice to the holder that the
Company's stock price has closed above $12.00 for forty-five
consecutive business days.
The fair value of the warrants was estimated to be approximately $1.5
million on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
(1) risk free interest rate of 6.0%,
(2) expected dividend yields of zero,
(3) expected volatility factor of the market price of the common stock of
80% and
(4) an expected life of the warrants of 2 years.
The Preferred Stock has a liquidation preference initially equal to 150% of
the full amount paid for such stock with the preference increasing by an
additional 50% per year over each of the next two years, so long as the
Preferred Stock is outstanding. The liquidation value of the Preferred Stock at
December 31, 1999 is $9.5 million.
The shares eligible for resale upon execution of the warrants and
conversion of the Preferred Stock have been registered under the Securities Act
of 1933, under two separate registration statements on Form S-3. Each investor
also agreed not to purchase more than 100,000 additional shares in the Company
without the Company's approval so long as such investor holds more than 5% of
the Company's outstanding securities.
F-18
<PAGE>
12. Special Situations Warrant Exercise
On December 30, 1998, the Company raised $1.4 million through the private
placement of 700,000 shares of Common Stock plus Warrants to purchase an
additional 350,000 shares of Common Stock. The funding was provided by funds
affiliated with Special Situations Fund, a current stockholder in the Company.
The Common Stock was sold at $2.00 per share and the warrants, which permit the
purchase of an additional 350,000 shares at a price of $2.25, were sold for an
additional $43,750. The Warrants were exercised on December 1, 1999 for a total
purchase price of $787,500.
13. Legal Proceedings
The Company and certain of its present and former officers and directors
were named as defendants in four class action lawsuits filed in the United
States District Court for the Northern District of California, filed on January
26, 1998, February 5, 1998, March 11, 1998 and March 18, 1998, respectively. On
June 19, 1998, a Consolidated Amended Complaint was filed in the above mentioned
court, by the lead Plaintiff named by the court. The amended complaint alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and
Securities and Exchange Commission Rule 10b-5 promulgated under the Securities
Exchange Act, in connection with public statements about the Company's expected
financial performance. The complaint seeks an unspecified amount of damages. The
Company vigorously denies the plaintiffs' claims and has moved to dismiss the
allegations. The Plaintiff has filed a response to the Company's motion to
dismiss and the Company has filed an opposition to Plaintiff's response. The
motion to dismiss was submitted to the court for consideration on November 13,
1998 and the court has not yet issued a decision. Securities litigation can be
expensive to defend, consume significant amounts of management time and result
in adverse judgments or settlements that could have a material adverse effect on
the Company's results of operations and financial condition. Also see Note 6
with respect to the resolution of a matter with Soft Mountain.
F-19
<PAGE>
VERSANT CORPORATION AND SUBSIDIARIES
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, 1997 $ 603 208 145 $ 666
Year ended December 31, 1998 $ 666 857 1,188 $ 335
Year ended December 31, 1999 $ 335 155 76 $ 414
</TABLE>
F-20
<PAGE>
EXHIBIT INDEX
EXHIBIT INDEX
EXHIBIT TITLE
NUMBER
2.01 -- Acquisition Agreement dated as of March 26, 1997 by and between
registrant and ISAR-Vermogensverwaltung Gbr mbH ("ISAR")(1)
3.01 -- Registrant's Amended and Restated Articles of Incorporation, as
amended(2)
3.02 -- Registrant's Certificate of Amendment of Articles of
Incorporation filed prior to the closing of registrant's initial
public offering(2)
3.03 -- Registrant's Amended and Restated Articles of Incorporation
filed following the closing of registrant's initial public
offering(2)
3.04 -- Registrant's Bylaws(2)
3.05 -- Registrant's Amended and Restated Bylaws adopted prior to the
closing of registrant's initial public offering(2)
3.06 -- Certificate of Amendment of Amended and Restated Articles of
Versant Object Technology Corporation(7)
3.07 -- Registrant's Certificate of Determination dated July 12, 1999,
incorporated by reference to the Company's current report on
Form 8-K (Exhibit 3.01) filed July 12, 1999.
4.01 -- [intentionally omitted]
4.02 -- Preferred Stock Purchase Agreement, dated as of April 27, 1994,
as amended(2)
10.01 -- Registrant's 1989 Stock Option Plan, as amended, and related
documents(2)**
10.02 -- Registrant's 1996 Equity Incentive Plan, as amended, and related
documents(3)**
10.03 -- Registrant's 1996 Directors Stock Option Plan, as amended, and
related documents(4)**
10.04 -- Registrant's 1996 Employee Stock Purchase Plan, as amended, and
related documents(5)**
10.05 -- Registrant's 401(k) Plan and addendum thereto(2)
10.06 -- Lease Agreement dated March 22, 1993 between Lincoln Property
Company N.C., Inc. and Registrant, as amended(2)
10.07 -- Master Lease Agreement dated January 26, 1996 between LINC
Capital Management, a division of Scientific Leasing Inc., and
Registrant(2)
X-1
<PAGE>
10.08 -- Amended and Restated Loan and Security Agreement dated as of
June 14, 1996 between Registrant and Silicon Valley Bank(2)
10.09 -- Joint Venture Agreement dated as of July 26, 1995 between
Registrant and ISAR-Vermogensverwaltung Gbr mbH(2)*
10.10 -- Form of Indemnity Agreement entered into by Registrant with each
of its directors and executive officers(2)
10.11 -- 1996 Executive Compensation Plan -- Rich Kadet (2)*/**
10.12 -- 1996 Executive Compensation Plan -- George Franzen (2)*/**
10.13 -- 1996 Executive Compensation Plan -- Jim Lochry (2)*/**
10.14 -- Form of Amendment to Versant Corporation Stock Option
Agreement(2)**
10.15 -- Lease Agreement dated November 25, 1996 between John Arrillaga,
Trustee et. al. and Versant Corporation(6)
10.16 -- Form of Letter Agreement dated October 22, 1997 between
registrant and its executive officers(9)**
10.17 -- Severance Agreement and Release of Claims dated January 7, 1997
between registrant and David Banks(9)**
10.18 -- Letter Agreement dated November 26, 1997 between registrant and
Nick Ordon(9)**
10.19 -- Revolving Credit Loan and Security Agreement dated May 15,
1997(7)
10.20 -- Consulting Agreement between Company and David Banks dated
January 7, 1998(7)
10.21 -- Variable Rate-Installment Note dated March 19, 1998(7)
10.22 -- Equipment Rider dated March 19, 1998(7)
10.23 -- Corporate Resolution and Incumbency Certification dated March
30, 1998(7)
10.24 -- Modification to Loan and Security Agreement dated May 6, 1998(7)
10.25 -- Waiver to Loan and Security Agreement Covenants Dated August 10,
1998(8)
10.26 -- Waiver to Loan and Security Agreement Dated August 11, 1998(8)
10.27 -- Loan and Security Agreement Consent and Amendment Dated October
16, 1998(10)
10.28 -- Vertex Note Purchase Agreement Dated October 16, 1998(10)
10.29 -- Vertex Convertible Secured Subordinated Promissory Note Dated
October 16, 1998(10)
X-2
<PAGE>
10.30 -- Vertex Security Agreement Dated October 16, 1998(10)
10.31 -- Vertex Registration Rights Agreement Dated October 16, 1998(10)
10.32 -- Vertex Subordination Agreement Dated October 16, 1998(10)
10.33 -- Special Situations Fund Common Stock and Warrant Purchase
Agreement Dated December 28, 1998(10)
10.34 -- Special Situations Fund Stock Warrant Dated December 28,
1998(10)
10.35 -- Special Situations Fund Registration Rights Agreement Dated
December 28, 1998(10)
10.36 -- Modification to Loan & Security Agreement dated June 18, 1999
incorporated by reference to the Company's previous quarterly
report on Form 10-Q filed August 2, 1999.
10.37 -- Preferred Stock and Warrant Purchase Agreement entered into as
of June 28, 1999 incorporated by reference to the Company's
current report on Form 8-K (Exhibit 10.01) filed July 12, 1999.
10.38 -- Form of Common Stock Purchase Warrant. 1999 incorporated by
reference to the Company's current report on Form 8-K (Exhibit
10.02) filed July 12, 1999.
10.39 -- Debt Cancellation Agreement between the Company and Vertex
Technology Fund, Inc incorporated by reference to the Company's
current report on Form 8-K (Exhibit 10.03) filed July 12, 1999.
10.40 -- Supplement to Registration Rights Agreement among the Company
and the parties listed on the Schedule of Investors attached
thereto incorporated by reference to the Company's current
report on Form 8-K (Exhibit 10.04) filed July 12, 1999.
10.41 -- 1996 Equity Incentive Plan, Amended as of January 19,2000 (11)
10.42 -- Public Relations Firm Agreement Dated November 1,1999 (11)
10.43 -- Bank Covenant Waiver Dated January 1, 2000 (11)
10.44 -- Bank Financial Covenant Modifications Dated March 16, 2000 (11)
21.01 -- Subsidiaries of the registrant(11)
23.01 -- Consent of Arthur Andersen LLP, Independent Public
Accountants(11)
27.01 -- Financial Data Schedule(11)
(1) Incorporated by reference to the registrant's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
April 10, 1997
(2) Incorporated by reference to the registrant's Registration
Statement on Form SB-2 (file number 333-4910-LA) filed with and
declared effective by the Securities and Exchange Commission on
July 17, 1996.
X-3
<PAGE>
(3) Incorporated by reference to Exhibit 4.05 to the registrant's
Registration Statement on Form S-8 (file number (333-29947) filed
with the Securities and Exchange Commission on June 24, 1997.
(4) Incorporated by reference to Exhibit 4.06 to the registrant's
Registration Statement on Form S-8 (file number (333-29947) filed
with the Securities and Exchange Commission on June 24, 1997.
(5) Incorporated by reference to Exhibit 4.07 to the registrant's
Registration Statement on Form S-8 (file number (333-29947) filed
with the Securities and Exchange Commission on June 24, 1997.
(6) Incorporated by reference to the registrant's Form 10-KSB for the
year ended December 31, 1996, filed with the Securities and
Exchange Commission on March 31, 1997.
(7) Incorporated by reference to the registrant's Form 10-QSB for the
quarter ended June 30, 1998, filed with the Securities and
Exchange Commission on August 14, 1998.
(8) Incorporated by reference to the registrant's Form 10-QSB for the
quarter ended September 30, 1998, filed with the Securities and
Exchange Commission on November 13, 1998.
(9) Incorporated by reference to the registrant's Form 10-KSB for the
quarter ended December 31, 1997, filed with the Securities and
Exchange Commission on April 3, 1998.
(10) Incorporated by reference to the registrant's Form 10-KSB for the
quarter ended December 31, 1998, filed with the Securities and
Exchange Commission on April 3, 1999.
(11) Filed herewith.
* Confidential treatment has been granted with respect to certain
portions of this agreement. Such portions have been omitted from
the filing and have been filed separately with the Securities and
Exchange Commission.
** Management contract or compensatory plan.
X-4
Exhibit - 10.41
VERSANT CORPORATION
1996 EQUITY INCENTIVE PLAN
As Adopted May 21, 1996
As Amended June 5, 1997,
June 10, 1999 and January 19, 2000
1. PURPOSE. The purpose of this Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to Sections 2.2 and 18,
the total number of Shares reserved and available for grant and issuance
pursuant to this Plan will be 2,400,000 Shares. Subject to Sections 2.2 and 18,
Shares that: (a) are subject to issuance upon exercise of an Option but cease to
be subject to such Option for any reason other than exercise of such Option; (b)
are subject to an Award granted hereunder but are forfeited or are repurchased
by the Company at the original issue price; or (c) are subject to an Award that
otherwise terminates without Shares being issued will again be available for
grant and issuance in connection with future Awards under this Plan. Any
authorized shares not issued or subject to outstanding grants under the Versant
Corporation 1989 Stock Option Plan (the "Prior Plan") on the Effective Date (as
defined below) and any shares that: (a) are issuable upon exercise of options
granted pursuant to the Prior Plan that expire or become unexercisable for any
reason without having been exercised in full; (b) are subject to an award
granted pursuant to the Prior Plan but are forfeited or are repurchased by the
Company at the original issue price; or (c) are subject to an award granted
pursuant to the Prior Plan that otherwise terminates without shares being issued
will no longer be available for grant and issuance under the Prior Plan, but
will be available for grant and issuance under this Plan. At all times the
Company shall reserve and keep available a sufficient number of Shares as shall
be required to satisfy the requirements of all outstanding Options granted under
this Plan and all other outstanding but unvested Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of
outstanding Shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and (c)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the shareholders of the
Company and compliance with applicable securities laws; provided, however, that
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISO (as defined in Section 5 below) may be granted
only to employees (including officers and directors who are also employees) of
the Company or of a Parent or Subsidiary of the Company. All other Awards may be
granted to employees, officers, directors, consultants, independent contractors
and advisors of the Company or any Parent or Subsidiary of the Company; provided
such consultants, contractors and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. No person will be eligible to receive more than 400,000 Shares in
any calendar year under this Plan pursuant to the grant of Awards hereunder,
other than new employees of the Company or of a Parent or Subsidiary of the
Company (including new employees who are also officers and directors of the
Company or any Parent or Subsidiary of the Company) who are eligible to receive
up to a maximum of 600,000 Shares in the calendar year in which they commence
their employment. A person may be granted more than one Award under this Plan.
<PAGE>
4. ADMINISTRATION.
4.1 Committee Authority. This Plan will be administered by the
Committee or by the Board acting as the Committee. Subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan. Without
limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award
Agreement and any other agreement or document
executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations
relating to this Plan;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other
consideration subject to Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or any other incentive or
compensation plan of the Company or any Parent or Subsidiary of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment
of Awards;
(i) correct any defect, supply any omission or
reconcile any inconsistency in this Plan, any Award
or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or
advisable for the administration of this Plan.
4.2 Committee Discretion. Any determination made by the Committee
with respect to any Award will be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of this Plan
or Award, at any later time, and such determination will be final and binding on
the Company and on all persons having an interest in any Award under this Plan.
The Committee may delegate to one or more officers of the Company the authority
to grant an Award under this Plan to Participants who are not Insiders of the
Company.
4.3 Exchange Act Requirements. If two or more members of the
Board are Outside Directors, the Committee will be comprised of at least two (2)
members of the Board, all of whom are Outside Directors and Disinterested
Persons. During all times that the Company is subject to Section 16 of the
Exchange Act, the Company will take appropriate steps to comply with the
disinterested administration requirements of Section 16(b) of the Exchange Act,
which will consist of the appointment by the Board of a Committee consisting of
not less than two (2) members of the Board, each of whom is a Disinterested
Person.
5. OPTIONS. The Committee may grant Options to eligible persons and
will determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan
will be evidenced by an Award Agreement which will expressly identify the Option
as an ISO or an NQSO ("Stock Option Agreement"),
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and will be in such form and contain such provisions (which need not be the same
for each Participant) as the Committee may from time to time approve, and which
will comply with and be subject to the terms and conditions of this Plan.
5.2 Date of Grant. The date of grant of an Option will be the
date on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable immediately
(subject to repurchase pursuant to Section 12 of this Plan) or may be
exercisable within the times or upon the events determined by the Committee as
set forth in the Stock Option Agreement governing such Option; provided,
however, that no Option will be exercisable after the expiration of ten (10)
years from the date the Option is granted; and provided further that no ISO
granted to a person who directly or by attribution owns more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of any Parent or Subsidiary of the Company ("Ten Percent Shareholder") will
be exercisable after the expiration of five (5) years from the date the ISO is
granted. The Committee also may provide for the exercise of Options to become
exercisable at one time or from time to time, periodically or otherwise, in such
number of Shares or percentage of Shares as the Committee determines.
5.4 Exercise Price. The Exercise Price of an Option will be
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO
granted to a Ten Percent Shareholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised only by delivery
to the Company of a written stock option exercise agreement (the "Exercise
Agreement") in a form approved by the Committee (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 Termination. Notwithstanding the exercise periods set forth
in the Stock Option Agreement, exercise of an Option will always be subject to
the following:
(a) If the Participant is Terminated for any reason except death or
Disability, then the Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date no later than three (3)
months after the Termination Date (or such shorter or longer time
period not exceeding five (5) years as may be determined by the
Committee, with any exercise beyond three (3) months after the
Termination Date deemed to be an NQSO), but in any event, no
later than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's death
or Disability (or the Participant dies within three (3) months
after a Termination other than because of Participant's death or
disability), then Participant's Options may be exercised only to
the extent that such Options would have been exercisable by
Participant on the Termination Date and must be exercised by
Participant (or Participant's legal representative or authorized
assignee) no later than twelve (12) months after the Termination
Date (or such shorter or longer time period not exceeding five
(5) years as may be determined by the Committee, with any such
exercise beyond (a) three (3) months after the Termination Date
when the Termination is for any reason other than the
Participant's death or Disability, or
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(b) twelve (12) months after the Termination Date when the
Termination is for Participant's death or Disability, deemed to
be an NQSO), but in any event no later than the expiration date
of the Options.
(c) If a Participant is determined by the Board to have committed an
act of theft, embezzlement, fraud, dishonesty or a breach of
fiduciary duty to the Company or Subsidiary, neither the
Participant, the Participant's estate nor such other person who
may then hold the Option shall be entitled to exercise any Option
with respect to any Shares whatsoever, after termination of
service, whether or not after termination of service the
Participant may receive payment from the Company or Subsidiary
for vacation pay, for services rendered prior to termination, for
services rendered for the day on which termination occurs, for
salary in lieu of notice, or for any other benefits. In making
such determination, the Board shall give the Participant an
opportunity to present to the Board evidence on his behalf. For
the purpose of this paragraph, termination of service shall be
deemed to occur on the date when the Company dispatches notice or
advice to the Participant that his service is terminated.
5.7 Limitations on Exercise. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 Limitations on ISO. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year (under
this Plan or under any other incentive stock option plan of the Company, Parent
or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value
of Shares on the date of grant with respect to which ISOs are exercisable for
the first time by a Participant during any calendar year exceeds $100,000, then
the Options for the first $100,000 worth of Shares to become exercisable in such
calendar year will be ISOs and the Options for the amount in excess of $100,000
that become exercisable in that calendar year will be NQSOs. In the event that
the Code or the regulations promulgated thereunder are amended after the
Effective Date of this Plan to provide for a different limit on the Fair Market
Value of Shares permitted to be subject to ISO, such different limit will be
automatically incorporated herein and will apply to any Options granted after
the effective date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may modify,
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of a Participant, impair any of such Participant's rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered will be treated in accordance with Section 424(h)
of the Code. The Committee may reduce the Exercise Price of outstanding Options
without the consent of Participants affected by a written notice to them;
provided, however, that the Exercise Price may not be reduced below the minimum
Exercise Price that would be permitted under Section 5.4 of this Plan for
Options granted on the date the action is taken to reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in
this Plan, no term of this Plan relating to ISOs will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the
Company to sell to an eligible person Shares that are subject to restrictions.
The Committee will determine to whom an offer will be made, the number of Shares
the person may purchase, the price to be paid (the "Purchase Price"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a
Restricted Stock Award made pursuant to this Plan will be evidenced by an Award
Agreement ("Restricted Stock Purchase Agreement") that will be in such form
(which need not be the same for each Participant) as the Committee will from
time to time
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approve, and will comply with and be subject to the terms and conditions of this
Plan. The offer of Restricted Stock will be accepted by the Participant's
execution and delivery of the Restricted Stock Purchase Agreement and full
payment for the Shares to the Company within thirty (30) days from the date the
Restricted Stock Purchase Agreement is delivered to the person. If such person
does not execute and deliver the Restricted Stock Purchase Agreement along with
full payment for the Shares to the Company within thirty (30) days, then the
offer will terminate, unless otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to
a Restricted Stock Award will be determined by the Committee and will be at
least 85% of the Fair Market Value of the Shares on the date the Restricted
Stock Award is granted, except in the case of a sale to a Ten Percent
Shareholder, in which case the Purchase Price will be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8 of
this Plan.
6.3 Restrictions. Restricted Stock Awards will be subject to such
restrictions (if any) as the Committee may impose. The Committee may provide for
the lapse of such restrictions in installments and may accelerate or waive such
restrictions, in whole or part, based on length of service, performance or such
other factors or criteria as the Committee may determine.
7. STOCK BONUSES.
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares
(which may consist of Restricted Stock) for services rendered to the Company or
any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past
services already rendered to the Company, or any Parent or Subsidiary of the
Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that will
be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "Performance Stock Bonus
Agreement") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 Terms of Stock Bonuses. The Committee will determine the
number of Shares to be awarded to the Participant and whether such Shares will
be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of
performance goals pursuant to a Performance Stock Bonus Agreement, then the
Committee will determine: (a) the nature, length and starting date of any period
during which performance is to be measured (the "Performance Period") for each
Stock Bonus; (b) the performance goals and criteria to be used to measure the
performance, if any; (c) the number of Shares that may be awarded to the
Participant; and (d) the extent to which such Stock Bonuses have been earned.
Performance Periods may overlap and Participants may participate simultaneously
with respect to Stock Bonuses that are subject to different Performance Periods
and different performance goals and other criteria. The number of Shares may be
fixed or may vary in accordance with such performance goals and criteria as may
be determined by the Committee. The Committee may adjust the performance goals
applicable to the Stock Bonuses to take into account changes in law and
accounting or tax rules and to make such adjustments as the Committee deems
necessary or appropriate to reflect the impact of extraordinary or unusual
items, events or circumstances to avoid windfalls or hardships.
7.3 Form of Payment. The earned portion of a Stock Bonus may be
paid currently or on a deferred basis with such interest or dividend equivalent,
if any, as the Committee may determine. Payment may be made in the form of cash,
whole Shares, including Restricted Stock, or a combination thereof, either in a
lump sum payment or in installments, all as the Committee will determine.
7.4 Termination During Performance Period. If a Participant is
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or
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otherwise) with respect to the Stock Bonus only to the extent earned as of the
date of Termination in accordance with the Performance Stock Bonus Agreement,
unless the Committee will determine otherwise.
8. PAYMENT FOR SHARE PURCHASES.
8.1 Payment. Payment for Shares purchased pursuant to this Plan
may be made in cash (by check) or, where expressly approved for the Participant
by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to
the Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note
has been fully paid with respect to such shares); or (2) were
obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Sections 483 and
1274 of the Code; provided, however, that Participants who are
not employees or directors of the Company will not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to the
Participant for services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant
and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer") whereby
the Participant irrevocably elects to exercise the Option
and to sell a portion of the Shares so purchased to pay for
the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a
NASD Dealer whereby the Participant irrevocably elects to
exercise the Option and to pledge the Shares so purchased to
the NASD Dealer in a margin account as security for a loan
from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the Exercise Price directly to the
Company; or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant pay
for Shares purchased under this Plan by authorizing a guarantee by the Company
of a third-party loan to the Participant.
9. WITHHOLDING TAXES.
9.1 Withholding Generally. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan, payments
in satisfaction of Awards are to be made in cash, such payment will be net of an
amount sufficient to satisfy federal, state, and local withholding tax
requirements.
9.2 Stock Withholding. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant
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is obligated to pay the Company the amount required to be withheld, the
Committee may in its sole discretion allow the Participant to satisfy the
minimum withholding tax obligation by electing to have the Company withhold from
the Shares to be issued that number of Shares having a Fair Market Value equal
to the minimum amount required to be withheld, determined on the date that the
amount of tax to be withheld is to be determined (the "Tax Date"). All elections
by a Participant to have Shares withheld for this purpose will be made in
writing in a form acceptable to the Committee and will be subject to the
following restrictions:
(a) the election must be made on or prior to the
applicable Tax Date;
(b) once made, then except as provided below, the election will be
irrevocable as to the particular Shares as to which the election
is made;
(c) all elections will be subject to the consent or
disapproval of the Committee;
(d) if the Participant is an Insider and if the Company is subject to
Section 16(b) of the Exchange Act: (1) the election may not be
made within six (6) months of the date of grant of the Award,
except as otherwise permitted by SEC Rule 16b-3(e) under the
Exchange Act, and (2) either (A) the election to use stock
withholding must be irrevocably made at least six (6) months
prior to the Tax Date (although such election may be revoked at
any time at least six (6) months prior to the Tax Date) or (B)
the exercise of the Option or election to use stock withholding
must be made in the ten (10) day period beginning on the third
day following the release of the Company's quarterly or annual
summary statement of sales or earnings; and
(e) in the event that the Tax Date is deferred until six (6) months
after the delivery of Shares under Section 83(b) of the Code, the
Participant will receive the full number of Shares with respect
to which the exercise occurs, but such Participant will be
unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
10. PRIVILEGES OF STOCK OWNERSHIP.
10.1 Voting and Dividends. No Participant will have any of the
rights of a shareholder with respect to any Shares until the Shares are issued
to the Participant. After Shares are issued to the Participant, the Participant
will be a shareholder and have all the rights of a shareholder with respect to
such Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's original Purchase Price pursuant to Section
12.
10.2 Financial Statements. The Company will provide financial
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
11. TRANSFERABILITY. Awards granted under this Plan, and any interest
therein, will not be transferable or assignable by Participant, and may not be
made subject to execution, attachment or similar process, otherwise than by will
or by the laws of descent and distribution or as consistent with the specific
Plan and Award Agreement provisions relating thereto. During the lifetime of the
Participant an Award will be exercisable only by the Participant, and any
elections with respect to an Award, may be made only by the Participant.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase a portion of or all Shares held by
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a Participant following such Participant's Termination at any time within ninety
(90) days after the later of Participant's Termination Date and the date
Participant purchases Shares under this Plan, for cash and/or cancellation of
purchase money indebtedness, at: (A) with respect to Shares that are "Vested"
(as defined in the Award Agreement), the higher of: (l) Participant's original
Purchase Price, or (2) the Fair Market Value of such Shares on Participant's
Termination Date, provided, that such right of repurchase (i) must be exercised
as to all such "Vested" Shares unless a Participant consents to the Company's
repurchase of only a portion of such "Vested" Shares and (ii) terminates when
the Company's securities become publicly traded; or (B) with respect to Shares
that are not "Vested" (as defined in the Award Agreement), at the Participant's
original Purchase Price, provided, that the right to repurchase at the original
Purchase Price lapses at the rate of at least 20% per year over five (5) years
from the date the Shares were purchased (or from the date of grant of options in
the case of Shares obtained pursuant to a Stock Option Agreement and Stock
Option Exercise Agreement), and if the right to repurchase is assignable, the
assignee must pay the Company, upon assignment of the right to repurchase, cash
equal to the excess of the Fair Market Value of the Shares over the original
Purchase Price.
13. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; provided, however, that the Committee may
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or
from time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, Shares (including
Restricted Stock) or other consideration, based on such terms and conditions as
the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not
be effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance. Notwithstanding
any other provision in this Plan, the Company will have no obligation to issue
or deliver certificates for Shares under this Plan prior to: (a) obtaining any
approvals from governmental agencies that the Company determines are necessary
or advisable; and/or (b) completion of any registration or other qualification
of such Shares under any state or federal law or ruling of any governmental body
that the Company determines to be necessary or advisable. The Company will be
under no obligation to register the Shares with the SEC or to effect compliance
with the registration, qualification or listing requirements of any state
securities laws, stock exchange or automated quotation system, and the Company
will have no liability for any inability or failure to do so.
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17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
18.1 Assumption or Replacement of Awards by Successor. In the
event of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the shareholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but the Company's shareholders prior to the merger (other than any shareholder
that merges, or controls another corporation that merges, with the Company) own
less than 51% of the surviving corporation, or (d) the sale of substantially all
of the assets of the Company, any or all outstanding Awards may be assumed,
converted or replaced by the successor corporation (if any), which assumption,
conversion or replacement will be binding on all Participants. In the
alternative, the successor corporation may substitute equivalent Awards or
provide substantially similar consideration to Participants as was provided to
shareholders (after taking into account the existing provisions of the Awards).
The successor corporation may also issue, in place of outstanding Shares of the
Company held by the Participant, substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Participant. In the
event such successor corporation (if any) refuses to assume or substitute
Awards, as provided above, pursuant to a transaction described in this
Subsection 18.1, such Awards will expire on such transaction at such time and on
such conditions as the Board will determine.
18.2 Other Treatment of Awards. Subject to any greater rights
granted to Participants under the foregoing provisions of this Section 18, in
the event of the occurrence of any transaction described in Section 18.1, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation, sale of assets or other
"corporate transaction."
18.3 Assumption of Awards by the Company. The Company, from time
to time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either; (a) granting an Award under this Plan in substitution of
such other company's award; or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(except that the exercise price and the number and nature of Shares issuable
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
19. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective
on the date on which the registration statement filed by the Company with the
SEC under the Securities Act registering the initial public offering of the
Company's Common Stock is declared effective by the SEC (the "Effective Date");
provided, however, that if the Effective Date does not occur on or before
December 31, 1996, this Plan will terminate having never become effective. This
Plan shall be approved by the shareholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
(12) months before or after the date this Plan is adopted by the Board. Upon the
Effective Date, the Board may grant Awards pursuant to this Plan; provided,
however, that: (a) no Option may be exercised prior to initial shareholder
approval of this Plan; (b) no Option granted pursuant to an increase in the
number of Shares subject to this Plan approved by the Board will be exercised
prior to the time such increase has been approved by the shareholders of the
Company; and (c) in the event that shareholder approval of such increase is not
obtained within the time period provided herein, all Awards granted hereunder
will be canceled, any Shares issued pursuant to any Award will be canceled, and
any
- 9 -
<PAGE>
purchase of Shares hereunder will be rescinded. So long as the Company is
subject to Section 16(b) of the Exchange Act, the Company will comply with the
requirements of Rule 16b-3 (or its successor), as amended, with respect to
shareholder approval.
20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of shareholder approval. This Plan
and all agreements thereunder shall be governed by and construed in accordance
with the laws of the State of California.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend this Plan in any respect, including without limitation
amendment of any form of Award Agreement or instrument to be executed pursuant
to this Plan; provided, however, that the Board will not, without the approval
of the shareholders of the Company, amend this Plan in any manner that requires
such shareholder approval pursuant to the Code or the regulations promulgated
thereunder as such provisions apply to ISO plans or (if the Company is subject
to the Exchange Act or Section 16(b) of the Exchange Act) pursuant to the
Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder,
respectively.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by
the Board, the submission of this Plan to the shareholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following
terms will have the following meanings:
"Award" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"Award Agreement" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee appointed by the Board to
administer this Plan, or if no such committee is appointed, the Board.
"Company" means Versant Corporation or any successor corporation.
"Disability" means a disability, whether temporary or permanent,
partial or total, within the meaning of Section 22(e)(3) of the Code, as
determined by the Committee.
"Disinterested Person" means a director who has not, during the
period that person is a member of the Committee and for one year prior to
commencing service as a member of the Committee, been granted or awarded equity
securities pursuant to this Plan or any other plan of the Company or any Parent
or Subsidiary of the Company, except in accordance with the requirements set
forth in Rule 16b-3(c)(2)(i) (and any successor regulation thereto) as
promulgated by the SEC under Section 16(b) of the Exchange Act, as such rule is
amended from time to time and as interpreted by the SEC.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exercise Price" means the price at which a holder of an Option
may purchase the Shares issuable upon exercise of the Option.
- 10 -
<PAGE>
"Fair Market Value" means, as of any date, the value of a share
of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the
date of determination as reported in The Wall Street Journal;
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national securities exchange on
which the Common Stock is listed or admitted to trading as
reported in The Wall Street Journal;
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the average of the closing bid and
asked prices on the date of determination as reported in The Wall
Street Journal;
(d) in the case of an Award made on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in
the initial public offering of the Company's Common Stock
pursuant to a registration statement filed with the SEC under the
Securities Act; or
(d) if none of the foregoing is applicable, by the
Committee in good faith.
"Insider" means an officer or director of the Company or any
other person whose transactions in the Company's Common Stock are subject to
Section 16 of the Exchange Act.
"Outside Director" means any director who is not; (a) a current
employee of the Company or any Parent or Subsidiary of the Company; (b) a former
employee of the Company or any Parent or Subsidiary of the Company who is
receiving compensation for prior services (other than benefits under a
tax-qualified pension plan); (c) a current or former officer of the Company or
any Parent or Subsidiary of the Company; or (d) currently receiving compensation
for personal services in any capacity, other than as a director, from the
Company or any Parent or Subsidiary of the Company; provided, however, that at
such time as the term "Outside Director", as used in Section 162(m) of the Code
is defined in regulations promulgated under Section 162(m) of the Code, "Outside
Director" will have the meaning set forth in such regulations, as amended from
time to time and as interpreted by the Internal Revenue Service.
"Option" means an award of an option to purchase Shares pursuant
to Section 5.
"Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if at the time of the
granting of an Award under this Plan, each of such corporations other than the
Company owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
"Participant" means a person who receives an Award under this
Plan.
"Plan" means this Versant Corporation1996 Equity Incentive Plan,
as amended from time to time.
"Restricted Stock Award" means an award of Shares pursuant to
Section 6.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
- 11 -
<PAGE>
"Shares" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"Stock Bonus" means an award of Shares, or cash in lieu of
Shares, pursuant to Section 7.
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"Termination" or "Terminated" means, for purposes of this Plan
with respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, director, consultant, or advisor to the Company
or a Parent or Subsidiary of the Company. An employee will not be deemed to have
ceased to provide services in the case of (i) sick leave, (ii) military leave,
or (iii) any other leave of absence approved by the Committee, provided, that
such leave is for a period of not more than 90 days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute or unless
provided otherwise pursuant to formal policy adopted from time to time by the
Company and issued and promulgated to employees in writing. In the case of any
employee on an approved leave of absence, the Committee may make such provisions
respecting suspension of vesting of the Option while on leave from the employ of
the Company or a Subsidiary as it may deem appropriate, except that in no event
may an Option be exercised after the expiration of the term set forth in the
Option agreement. The Committee will have sole discretion to determine whether a
Participant has ceased to provide services and the effective date on which the
Participant ceased to provide services (the "Termination Date").
Exhibit - 10.42
FINANCIAL PUBLIC RELATIONS AGREEMENT
THIS FINANCIAL PUBLIC RELATIONS AGREEMENT ("Agreement") is made and entered into
this 1st day of November, 1999 (the "Effective Date") by and between Versant
Corporation, a California Corporation ("Company") and Liolios Group, Inc., a
California Corporation ("Consultant").
RECITALS
Company desires to engage Consultant to perform certain financial public
relations services for it, and Consultant desires, subject to the terms and
conditions of this Agreement, to perform financial public relations services for
Company.
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL PROMISES AND UNDERTAKING HEREIN
CONTAINED AND FOR OTHER GOOD AND VALUABLE CONSIDERATION THE RECEIPT AND
SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED THE PARTIES AGREE AS FOLLOWS:
1. ENGAGEMENT OF CONSULTANT
Company hereby engages Consultant and Consultant hereby agrees to
hold itself available to render, and to render at the request of the
Company, independent advisory and consulting services for the Company
to the best of its ability, upon the terms and conditions hereinafter
set forth. Such consulting services shall include but not be limited
to the development, implementation and maintenance of an on-going
stock market support system that increases broker awareness of the
company's activities and stimulates investor interest in the Company.
The stock market support system shall include but not be limited to a
Shareholder Communication System, and Media Relation Systems, which
will be defined and developed by Consultant. It is understood that
Consultant's ability to relate information regarding the Company's
activities is directly proportionate to information availed by the
company to the Consultant.
2. TERM
<PAGE>
The term of this Agreement ("Term") shall begin as of the Effective
Date and shall terminate twelve (12) months thereafter ("Anniversary
Date"), unless terminated or extended in accordance with the
provisions of this Agreement.
3. COMPENSATION
As compensation for the services rendered by the Consultant under
this Agreement, Company agrees to pay to Consultant $60,000 annually,
at a rate of $5,000 per month in advance of each month. This is in
addition to reimbursement of reasonable out-of-pocket authorized
expenses.
Further as compensation to the consultant for services rendered
pursuit to this agreement, the Company shall, upon execution of this
agreement, issue warrants (collectively, the "Warrants") to purchase
up to 125,000 shares of common stock of VSNT (the "Stock") at a price
of $.001 per share ($125.00 in the aggregate). The warrants shall
vest and become exercisable, and shall terminate, pursuant to the
following schedule:
(a) 25,000 Warrants shall vest upon the execution of this
agreement at an exercise price of $3.00 per share of Stock.
(b) 25,000 Warrants shall vest at an exercise price of $3.75 per
share of Stock, if and when the Stock trades at $4.00,
provided that such Warrant shall terminate if not vested
within (9) nine months of the Effective Date or if
Consultant terminates this Agreement prior to vesting.
(c) 25,000 Warrants shall vest at an exercise price of $4.50 per
share of Stock, if and when the Stock trades at $6.00,
provided that such Warrant shall terminate if not vested
within (12) twelve months of the Effective Date or if
Consultant terminates this Agreement prior to vesting.
(d) 25,000 Warrants shall vest at an exercise price of $5.25 per
share of Stock, if and when the Stock trades at $8.00,
provided that such Warrant shall terminate if not vested
within (21) twenty-one months of the Effective Date or if
Consultant terminates this Agreement prior to vesting.
<PAGE>
(e) 25,000 Warrants shall vest at an exercise price of $6.00 per
share of Stock, if and when the Stock trades at $10.00,
provided that such Warrant shall terminate if not vested
within (30) thirty months of the Effective Date or if
Consultant terminates this Agreement prior to vesting.
Provided however, in the case of (d) and (e) above, in the event of
termination of the Agreement by Company, the number of Warrants shall
be multiplied by a fraction equal to the full or partial months
served prior to termination by Company divided by twelve (12) months
(and not to exceed one), the remainder of such Warrants terminating
on the date of termination.
For purposes of determining when Warrants vest under the foregoing
paragraphs, the Stock "trades" at a price when the last reported
trade, as quoted by the NASDAQ Stock Market, equals or exceeds the
price specified for ten (10) continuous trading days.
The vested Warrants shall have a term of three (3) years from the
Effective Date of this agreement.Despite the foregoing, 100,000 of
the Warrants shall vest on the fourth anniversary of the Effective
Date of this Agreement at a strike price of $10.00 unless the
Agreement terminates prior thereto.
4. INDEPENDENT CONTRACTOR
It is expressly agreed that the Consultant is acting as an
independent contractor in performing its services hereunder. Company
shall carry no workmen's compensation insurance or any health or
accident insurance to cover Consultant. Company shall not pay any
contributions to social security, unemployment insurance, Federal or
state withholding taxes nor provide any other contributions or
benefits which might expected in an employer-employee relationship.
5. ASSIGNMENT
This Agreement is a personal one being entered into in reliance upon
and in consideration of the singular personal skills and
qualifications of Consultant.
<PAGE>
Consultant shall therefore not voluntarily or by operation of law
assign or otherwise transfer the obligations incurred on its part
pursuant to the terms of this Agreement without the prior written
consent of the Company. Any attempt at assignment to transfer by
Consultant of its obligation with out such consent shall be wholly
void.
6. CONFIDENTIAL INFORMATION
6.1 The term "Confidential Information" shall include, but not be limited
to, information regarding Company's business, plans, customers,
technology, and/or products that is confidential and of substantial
value to Company, which value would be impaired if such information
were disclosed to third parties. Company's Confidential Information
shall also include any and all non-public information, data know-how
and documentation which is related to Company's object-oriented
database system, language interfaces, database utilities, development
tools, Company supplied benchmarks or similar test results, system
internals, program strategies, and business plans.
6.2 Confidential Information shall not include information which (i) is
or becomes a part of the public domain through no act or omission of
the receiving party; or (ii) was in the receiving party's lawful
possession prior to the disclosure and had not been obtained by the
receiving party either directly or indirectly from the disclosing
party; or (iii) is lawfully disclosed to the receiving party by a
third party without restriction on disclosure; or (iv) is
independently developed by the receiving party; or (v) is required to
be disclosed by law provided that the disclosing party has had seven
(7) days to respond to the request.
6.3 Consultant agrees, both during the term of this Agreement and for a
period of two years thereafter, to hold Company's Confidential
Information in confidence, and agrees not to make such Confidential
Information available in any form to any third party, or use such
Confidential Information for any other purpose than the
implementation of this Agreement. Consultant agrees to take all
reasonable steps to ensure that Company's Confidential Information is
not disclosed or distributed by its employees or agents in violation
of the provisions of this Agreement. Termination of the Agreement
shall not relieve Consultant of its obligations under this Section 6.
<PAGE>
7. TERMINATION
This Agreement may be terminated by either party for any reason upon
thirty (30) days notice in writing. In the event the Agreement is
terminated, Consultant shall cease rendering its services to Company
as of the effective date of termination and Company shall pay
Consultant for the services performed and approved expenses through
the date of termination. Any materials created as the result of
Consultant's provision of services to Company shall be delivered to
Company within ten (10) days of the date of termination.
8. GENERAL PROVISIONS
8.1 Governing Law and Jurisdiction
This Agreement shall be governed by and interpreted in accordance
with the laws of the State of California. Each of the Parties hereto
consents to such jurisdiction for the enforcement of this Agreement
and matters pertaining to the transaction and activities contemplated
hereby.
8.2 Non-Circumvention and Non-Disclosure Neither the Company nor its
directors, officers, agents attorneys, employees, affiliates,
representatives, successors, or assigns (collectively referred to as
the "Company") will attempt to consummate a transaction with any
financing sources, or potential acquisition, introduced by the
Consultant without first notifying Consultant, and satisfying
Consultant's right to a two percent (2%) fee, on a per transaction
basis. This provision will inure for a period of three (3) years form
the date affixed to this document. However, any contacts introduced
to the Company in the "normal course" of Consultant's primary
contracted services shall not apply; further, all sources of business
shall not be unreasonably withheld. The Company shall keep completely
confidential the identity of all such financing parties. It is
understood that this Agreement is a reciprocal one between the
signatories concerning the privileged information and contacts.
8.3 Notices
As such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five (5)
business days after
<PAGE>
deposit in any United States Post Office in the continental United
States, postage prepaid, if mailed; when answered back, if telexed,
when receipt is acknowledged or confirmed, if telecopies.
8.4 Attorney's Fees
In the event a dispute arises with respect to this Agreement, the
party prevailing in such dispute shall be entitled to recover all
expenses, including, without limitation, reasonable attorney's fees
and expenses incurred in ascertaining such party's rights, in
preparing to enforce or in enforcing such party's rights under this
Agreement, whether or not it was necessary for such party to
institute suit. Further, in the event the Company, its officers, and
or its directors cause a dispute in which Consultant is involved, the
Company agrees to hold Consultant harmless, and provide reasonable
attorney fees. Company further agrees to notify Consultant
immediately of such event.
8.5 Complete Agreement
This Agreement supersedes any and all of the other agreements, either
oral or in writing, between the Parties with respect to such subject
matter in any manner whatsoever. Each Party to this Agreement
acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any Party, or anyone
herein, and that no other Agreement, statement or promise not
contained in the Agreement may be changed or amended only by an
amendment in writing signed by all of the Parties or their respective
successors-in-interest.
8.6 Binding
This Agreement shall be binding upon and inure to the benefit of the
successors-in-interest, assigns and personal representatives of the
respective Parties.
8.7 Unenforceable Terms
Any provision hereof prohibited by law or unenforceable under the law
of any jurisdiction in which such provision is applicable shall
adhere to such jurisdiction only be ineffective without affecting any
other provision if this Agreement. To the full extent, however, that
such applicable law may by waived to the end that this Agreement be
deemed to be a valid and binding agreement enforceable in
<PAGE>
accordance with its terms, the Parties hereto hereby waive such
applicable law knowingly and understanding the effect of such waiver.
8.8 Execution in Counterparts
This Agreement may be executed in several counterparts and when so
executed shall constitute one agreement binding on all the Parties,
notwithstanding that all the Parties are not signatory to the
original and same counterpart.
8.9 Further Assurances
From time to time each Party will execute and deliver such further
instruments and will take such other action as any other Party may
reasonably request in order to discharge and perform their
obligations and agreements hereunder and to give effect to the
intentions expressed in this Agreement.
8.10 Incorporation By Reference
All exhibits referred to in this Agreement are incorporated herein
in their entirety by such reference.
8.11 Miscellaneous Provisions
The various headings and numbers herein and the grouping of
provisions of this Agreement into separate articles and paragraphs
are for the purpose of convenience only and shall not be considered a
part hereof. The language in all parts of this Agreement shall in all
cases be construed in accordance with its fair meanings as if
prepared by a all Parties to the Agreement and not strictly for or
against any of the Parties.
9. Notices
Any notice or other communication required or permitted hereunder
shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission (provided acknowledgement of
receipt thereof is delivered to the sender) or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be
deemed given when so delivered personally, telegraphed, telexed, sent
by facsimile transmission or, if mailed, three days after the date of
deposit in the United States mails as follows:
<PAGE>
If to Consultant, to:
Liolios Group, Inc.
2431 West Coast Hwy., #202
Newport Beach, CA. 92663
If to Company, to:
Versant Corporation
6539 Dumbarton Circle
Freemont, CA. 94555
or such address as any of the above shall have
specified by notice hereunder.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the day and year first hereinabove written.
VERSANT CORPORATION
By:_________________________
Name: Nick Ordon
Title: President
LIOLIOS GROUP, INC.
By:_________________________
Name: J. Scott Liolios
Title: President
Exhibit - 10.43
Covenant Waiver
55 Almaden Boulevard
San Jose, CA 95113-1609
(408)556-5836 January 31, 2000
Via Facsimile and First Class Mail
Gary O. Rhea, CFO
Versant Corporation
6539 Dumbarton Circle
Fremont, CA 94555
Re: Revolving Loan and Security Agreement dated as of May 15, 1997, as
modified from time to time in writing (the "Agreement"), between
Versant Corporation ("Borrower") and Comerica Bank - California ("Bank")
Dear Gary:
We have learned of the following breach of the Agreement based upon
Borrower prepared financial statements and press release communication with
Borrower as of the fiscal quarter ending December 31, 1999. Borrower is in
violation of the following:
Section 6.17 (g) Net income after taxes of at least One Dollar ($1.00),
for each fiscal quarter of Borrower commencing with the fiscal quarter ending
September 30, 1999.
Bank has agreed to waive the breach described above for the period ending
December 31, 1999 until March 31, 2000. Except as specifically set forth in this
letter, all other terms and conditions of the Agreement shall remain in full
force and effect. This waiver is not a waiver of any other, or future breach, of
any other term or condition of the Agreement.
Very truly yours,
Comerica Bank - California
Roland Tucker
Vice President
Exhibit - 10.44
Financial Covenant Modifications
55 Almaden Boulevard
San Jose, CA 95113-1609
(408)556-5836 March 16, 2000
Gary Rhea,
Chief Financial Officer
Versant Corporation
6539 Dumbarton Circle
Fremont, CA 94555
Re: Financial covenant modifications
Dear Gary:
This Modification Letter Agreement ("Letter Agreement") is entered into by
Versant Corporation ("Borrower") and Comerica Bank - California ("Bank") as of
March 16, 2000. Borrower and Bank are currently parties to that certain
Revolving Credit Loan and Security Agreement (the "Agreement") dated as of May
15, 1997, as modified from time to time in writing (together with the documents
executed in connection therewith collectively the "Loan Documents") and entered
into the Third Modification to Revolving Credit Loan & Security Agreement and
First Modification to Variable Rate-Installment Note ("Modification") dated as
of June 18, 1999. Borrower and Bank desire to and hereby do agree to modify
Section B.4 of the Modification follows:
The following sub-sections of Section B. 4. b. of the Modification
shall be deleted in their entirety and replaced with the following:
"b. Section 6.17 The following sub-sections of Section 6.17 are
hereby deleted in their entirety and replaced with the following:
d. A Liquidity Ratio ( defined as (a) the sum of ( i ) cash
plus ( ii ) accounts receivable to (b) the sum of the
balance outstanding under this Agreement, plus (ii) the
current portion of long term debt, plus (iii) accounts
payable) of not less than 2.50:1.0 as of the last day of
the fiscal quarter ending March 31, 2000; not less than
3.0:1.0 as of the last day of the fiscal quarter ending
June 30, 2000; and lastly, not less than 3.5:1.0 as of the
last day of the fiscal quarter ending September 30, 2000
and each fiscal quarter thereafter.
<PAGE>
Gary Rhea
March 16, 2000
Page 2
f. Net Operating Cash, as defined in FASB 95 and 102, not less
than [$365,000] as of the last day of the fiscal quarter
ending March 31, 2000; equal to or greater than $1,000,000 as
of the last day of the fiscal quarter
ending June 30, 2000; not less than [$550,000] as of the last
day of the fiscal quarter ending September 30, 2000; and
lastly, equal to or greater than $1,000,000 as of the last day
of each fiscal quarter thereafter."
Except as specifically set forth in this Letter Agreement, all of terms
and conditions of the Loan Documents remain in full force and effect in
accordance with their original terms and conditions and Borrower hereby affirms,
ratifies and approves the Loan Documents.
Kindly acknowledge your agreement with the terms and conditions of this
Letter Agreement by signing and returning a copy of this letter.
Very truly yours,
Comerica Bank - California
Roland Tucker
Vice President
Acknowledged and Agreed to on ____________________, 2000
Versant Corporation
___________________________________
Gary Rhea,
Chief Financial Officer
SUBSIDIARIES OF THE REGISTRANT
Subsidiary and Name under which
Subsidiary Does Business Jurisdiction of Incorporation
Versant GmbH (Europe) Germany
Versant SARL France
Versant Ltd. United Kingdom
Versant Pty Ltd. Australia
Soft Mountain S.A. France
Versant India India
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated January 25, 2000 included in this Form 10-KSB into the
Company's previously filed Registration Statements, File Nos. 333-08537 and
333-29947 (both filed on Form S-8).
ARTHUR ANDERSEN LLP
San Jose, California
March 30, 2000
<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> 1000
<S> <C>
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0
5,662
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</TABLE>
