UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-28540
VERSANT CORPORATION
(Exact name of Small Business Issuer as specified in its charter)
California 94-3079392
---------- ----------
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization
6539 Dumbarton Circle
Fremont, California 94555
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (510) 789-1500
Check whether the Issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of common stock, no par value, outstanding
as of April 28, 2000: 11,222,172
----------
Transitional Small Business Disclosure Format (check one):
Yes No X
---- ----
1
<PAGE>
VERSANT CORPORATION
FORM 10-QSB
Quarterly Period Ended March 31, 2000
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Consolidated Balance Sheets -- March 31, 2000
and December 31, 1999 3
Consolidated Statements of Operations -- Three Months Ended
March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Exhibits and Reports on Form 8K 16
Signature 17
2
<PAGE>
VERSANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------------- ----------------
(Unaudited) *
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,177 $ 3,663
Accounts receivable, net 8,906 7,278
Other current assets 436 753
-------------- ---------------
Total current assets 11,519 11,694
Property and equipment, gross 13,778 13,639
Accumulated depreciation (8,649) (8,161)
-------------- ---------------
Property and equipment, net 5,129 5,478
Other assets 106 190
Excess of cost of investment over fair value of
net assets acquired 1,744 1,879
-------------- ---------------
Total assets $ 18,498 $ 19,241
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 165 $ 1,400
Current maturities of long-term debt 841 1,240
Current portion of capital lease obligations 165 253
Accounts payable 916 718
Accrued liabilities 2,676 3,405
Deferred revenue 3,176 3,094
-------------- ---------------
Total current liabilities 7,939 10,110
Long-term liabilities, net of current portion:
Deferred revenue 396 416
Capital lease obligations 88 127
-------------- ---------------
Total liabilities 8,423 10,653
Shareholders' equity:
Preferred stock 5,662 5,662
Common stock 49,678 48,528
Accumulated deficit (45,183) (45,627)
Cumulative other comprehensive income (82) 25
-------------- ---------------
Total shareholders' equity 10,075 8,588
-------------- ---------------
Total liabilities and shareholders' equity $ 18,498 $ 19,241
============== ===============
</TABLE>
* Derived from audited financial statements
The accompanying notes are an integral part of these consolidated
balance sheets
3
<PAGE>
VERSANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
2000 1999
--------------- ---------------
Revenue:
<S> <C> <C>
License $ 4,721 $ 3,771
Services 1,783 2,479
--------------- --------------
Total revenue 6,504 6,250
Cost of revenue:
License 114 289
Services 1,059 1,162
--------------- --------------
Total cost of revenue 1,173 1,451
--------------- --------------
Gross profit 5,331 4,799
Operating expenses:
Marketing and sales 2,103 3,038
Research and development 1,674 2,006
General and administrative 917 806
Amortization of goodwill 126 125
--------------- --------------
Total operating expenses 4,820 5,975
--------------- --------------
Income (loss) from operations 511 (1,176)
Other expense (48) (188)
--------------- --------------
Income (loss) before taxes 463 (1,364)
Provision for taxes 19 6
--------------- --------------
Net income (loss) $ 444 $ (1,370)
=============== ==============
Basic net income (loss) per share $ 0.04 $ (0.14)
=============== ==============
Diluted net income (loss) per share $ 0.03 $ (0.14)
=============== ==============
Basic weighted average common shares 10,860 10,136
Diluted weighted average common shares 15,564 10,136
</TABLE>
The accompanying notes are an integral part of these consolidated statements
4
<PAGE>
VERSANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 444 $ (1,370)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 623 581
Provision for doubtful accounts 21 165
Changes in current assets and liabilities:
Accounts receivable (1,649) (344)
Other current assets 317 604
Other assets 84 38
Accounts payable 198 (600)
Accrued liabilities (729) (785)
Deferred revenue 62 258
-------------- -------------
Net cash used in operating activities (629) (1,453)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale (purchases of) property and equipment (139) 43
-------------- -------------
Net cash provided (used) by investing activities (139) 43
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repurchase of) net proceeds from sale of common stock 1,150 (30)
Principal payments under capital lease obligations (127) (110)
Payments on short term debt and bank debt (1,634) (623)
-------------- -------------
Net cash used in financing activities (611) (763)
-------------- -------------
Effect of exchange rate changes on cash (107) 78
-------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,486) (2,095)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,663 3,564
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,177 $ 1,469
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
Versant Corporation ("Versant" or the "Company"), without audit, pursuant to
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements and the notes thereto
should be read in conjunction with the Company's audited financial statements
included in the Company's Form 10-KSB for the year ended December 31, 1999 filed
with the SEC. The unaudited information has been prepared on the same basis as
the annual financial statements and, in the opinion of the Company's management,
reflects all normal recurring adjustments necessary for a fair presentation of
the information for the periods presented. The interim results presented herein
are not necessarily indicative of the results of operations that may be expected
for the full fiscal year ending December 31, 2000, or any other future period.
2. ORGANIZATION, OPERATIONS AND LIQUIDITY
Versant Corporation was incorporated in California in August 1988. References to
the "Company" in these Notes to 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
positive cash flow on a quarterly basis. The Company did generate a net profit
of $444,000 for quarter ended March 31, 2000, but operated at a net loss of $1.7
million and $19.9 million for the years ended December 31, 1999 and 1998,
respectively. Management anticipates funding future operations and repaying its
debt obligations from current cash resources and future cash flows from
operations. If financial results fall short of projections, additional debt or
equity may be required and the Company may need to implement further cost
controls. No assurances can be given that such efforts will be successful, if
required.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position (SOP)
97-2, "Software Revenue Recognition". Revenue consists mainly of revenue earned
under software license agreements, maintenance agreements and consulting and
training activities.
Revenue from perpetual software license agreements is recognized as revenue upon
shipment of the software if there is no significant modification of the
software, payments are due within the Company's normal payment terms and
collection of the resulting receivable is probable. If an acceptance period is
required, revenue is recognized upon the earlier of customer acceptance or the
expiration of the acceptance period.
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.
6
<PAGE>
Net Income (Loss) Per Share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards SFAS No. 128, "Earnings per Share", effective December 15,
1997. This standard revises 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. Common stock equivalents are excluded
from the diluted net income (loss) per share computation if their effect is
antidilutive.
The diluted net loss per share for the quarter ended March 31, 1999 was the same
as basic net loss per share due to losses in this quarter thus the inclusion of
potential common shares would have been antidilutive. The number of weighted
average potential common shares not included in the diluted net loss per share
calculation for the quarter ended March 31, 1999, was 97,653, because they were
antidilutive.
4. COMPREHENSIVE INCOME (LOSS)
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which was adopted by the Company in the first
quarter of 1998. SFAS No. 130 requires companies to report a new, additional
measure of income. "Comprehensive income" includes foreign currency translation
gains and losses and other unrealized gains and losses that have been previously
excluded from net income and reflected instead in equity.
A summary of comprehensive income (loss) follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
--------- ----------
<S> <C> <C>
Net Income (loss) $ 444 $ (1,370)
Foreign currency translation adjustment (107) 78
--------- ----------
Comprehensive income (loss) $ 337 $ (1,292)
</TABLE>
5. SEGMENT INFORMATION
In 1998 the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also established standards for related
disclosures about products and services, 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.
7
<PAGE>
The Company does not track assets by operating segments. Consequently, it is not
practicable to show assets by operating segment.
The table below presents a summary of operating segments (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
--------- ----------
Revenues from Unaffiliated Customers
<S> <C> <C>
License $ 4,721 $ 3,771
Support 1,206 1,526
Consulting & Training 577 953
--------- ----------
Total Revenue 6,504 6,250
Distribution Margin
License 4,607 3,482
Support 754 1,103
Consulting & Training (30) 214
--------- ----------
Total Distribution Margin 5,331 4,799
Profit Reconciliation:
Other Operating Expenses 4,820 5,975
Other Expense (48) (188)
--------- ----------
Income (Loss) Before Provision for Income Taxes $ 463 $ (1,364)
========= ==========
<CAPTION>
The table below presents the Company's revenues by legal subsidiary (in
thousands):
Three Months Ended March 31,
2000 1999
-------- --------
Total Revenues Attributable To:
<S> <C> <C>
United States $ 3,760 $ 2,795
Germany 514 1,977
France 454 769
United Kingdom 1,543 452
Australia/Asia Pacific 233 257
-------- --------
Total $ 6,504 $ 6,250
======== ========
</TABLE>
6. RECENTLY ISSUED ACCOUNTING STANDARDS
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) No. 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.
8
<PAGE>
7. 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 March 31, 2000 zero borrowings were
outstanding. Borrowings 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 interest at the bank's base lending rate
(9.00%, at March 31, 2000 plus 2.0%). The loan contains certain financial
covenants and also prohibits cash dividends and mergers and acquisitions without
the bank's prior approval. In March 2000 the Company negotiated new covenants
for the year ending December 31, 2000, based on the Company's forecasted
performance in 2000. Certain of these covenants, which the Company was not in
compliance with as of March 31, 2000 have been waived through such date.
On March 19, 1998, the Company converted an interest only, variable rate note to
a variable rate, term loan with principal and interest payable over 36 months.
The term loan covenants and interest rate were amended in conjunction with the
new line of credit agreement in March 1998. Borrowings under the loan are
secured by 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 (9.00%, at March 31, 2000 plus 2.5%).
The loan contains certain financial covenants and also prohibits cash dividends
and mergers and acquisitions without the bank's prior approval. In March 2000
the Company negotiated new covenants for the year ending December 31, 2000,
based on the Company's forecasted performance in 2000. Certain of these
covenants, which the Company was not in compliance with as of March 31, 2000
have been waived through such date.
8. 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.
9. RELATED PARTY TRANSACTIONS
In March 2000, the Company entered into a license agreement with a customer
having a member of their board of directors who is also a director of the
Company. The Company recognized $1.7 million of license revenue or 26% of total
revenue for the quarter ended March 31, 2000, related to this transaction.
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements within the
meaning of the Securities Exchange Act which reflect our current views with
respect to future events and financial performance. We have identified, with a
preceding asterisk, various sentences within this Form 10-QSB which contain such
forward-looking statements and words such as "believe," "anticipate," "expect,"
"intend" and similar expressions are also intended to identify forward looking
statements, but these are not the exclusive means of identifying such
statements. The forward looking statements included in this Form 10-QSB involve
numerous risks and uncertainties which are described throughout this Form
10-QSB, including under "Revenues" and "Risk Factors" within this Item 2. Please
refer to our December 31, 1999 10KSB on file with the Securities and Exchange
Commission, especially the section labeled "Risk Factors," for additional
disclosure information. The actual results that we achieve may differ materially
from any forward looking statements due to such risks and uncertainties.
We were incorporated in August 1988 and commenced commercial shipments of
our principal product, the Versant ODBMS, in 1991. Since that time,
substantially all of our revenue has been derived from:
1) sales of development, deployment and project licenses for the Versant
ODBMS
2) sales of the peripheral products for the Versant ODBMS
3) related maintenance and support, training, consulting and nonrecurring
engineering fees received in connection with providing services
associated with the Versant ODBMS and
4) the resale of licenses, maintenance, training and consulting for
third-party products that complement the Versant ODBMS
During the first quarter of 2000, the Company entered into two license
agreements in excess of one million dollars each, and six license agreements,
averaging between $100,000 to $250,000. The Company is placing increased
emphasis on generating recurring revenue opportunities, as opposed to larger one
time licenses, to improve our ability to forecast revenues and consequently
manage expenses. *In addition, we seek to develop relationships with
best-of-class value-added resellers in the telecommunications and financial
services markets in order to strengthen our indirect sales activity.
Our emphasis on electronic business or "e-business" infrastructure yielded
benefits in the past quarter, as a substantial portion, approximately two
million, of first quarter's 2000 revenue is attributable to this area. *We
believe the rapid adoption of application servers for e-business applications
has been demonstrated and represents a significant new growth market for
Versant.
Worldwide headcount as of March 31, 2000 was 110 compared to the March 31,
1999 total of 115. *In prior quarters we have taken significant actions to
decrease our operating expenses, and we believe our operating expenses are now
in line with our revenue mix and level.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentages that each income statement
item compares to total revenue for the three months ended March 31, 2000 and
1999.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
---------- ---------
<S> <C> <C>
Revenue:
License 72.6% 60.3%
Services 27.4% 39.7%
---------- ---------
Total revenue 100.0% 100.0%
---------- ---------
Cost of revenue:
License 1.8% 4.6%
Services 16.2% 18.6%
---------- ---------
Total cost of revenue 18.0% 23.2%
---------- ---------
Gross profit 82.0% 76.8%
---------- ---------
Operating expenses:
Marketing and sales 32.3% 48.6%
Research and development 25.8% 32.1%
General and administrative 14.1% 12.9%
Amortization of goodwill 1.9% 2.0%
---------- ---------
Total operating expenses 74.1% 95.6%
---------- ---------
Income (loss) from operations 7.9% (18.8%)
Other expense (.8%) (3.0%)
---------- ---------
Income (loss) before taxes 7.1% (21.8%)
Provision for taxes 0.3% 0.1%
---------- ---------
Net loss 6.8% (21.9%)
========== =========
</TABLE>
REVENUE
Total consolidated revenue increased 4.1% from $6.3 million in the first
quarter of 1999 to $6.5 million in the first quarter of 2000. This increase in
total revenue was due to an increase in license revenue mostly offset by a
decrease in services revenue.
License revenue
License revenue increased 25.2% from $3.8 million in the first quarter of
1999 to $4.7 million in the first quarter of 2000. This increase was primarily
the result of additional new customer development and runtime licenses from the
eBusiness sector. License revenue increased in the first quarter of 2000 to
72.6% of total sales compared to 60.3% in the first quarter of 1999.
Services revenue
Services revenue decreased 28.1% from $2.5 million in the first quarter of
1999 to $1.8 million in the first quarter of 2000. The decrease was primarily
due to reduced consulting opportunities, as well as a reduction in our charges
for certain types of maintenance. Services revenue decreased to 27.4% of total
revenue in the first quarter of 2000 compared to 39.7% of total revenue in the
first quarter of 1999.
11
<PAGE>
International sales
International revenue decreased by 21% to $2.7 million in the first quarter
of 2000 compared to $3.5 million in the first quarter of 1999. The decrease in
international revenue during 2000 compared to 1999 resulted primarily from
higher sales in the United States and lower sales in Europe, both in line with
expectations. *We intend to maintain our sales and marketing activities outside
the United States, including Europe, Japan and other Asia/Pacific countries,
which will require significant management attention and financial resources, and
which may increase costs and impact margins unless increased revenue is
achieved. International revenue as a percentage of total revenue decreased from
55.3% in first quarter 1999 to 42.2% in first quarter 2000. *Even though the
current quarter international revenues decreased compared to prior years
comparable quarter, we still expect international revenue to remain a
significant percentage of total revenue.
COST OF REVENUE AND GROSS PROFIT
Total cost of revenue decreased to $1.2 million in the first quarter of
2000 from $1.5 million in the first quarter of 1999. This decrease was due to
reduced license and services cost of sales. Total cost of revenue as a
percentage of total revenues decreased to 18.0% in the first quarter of 2000
from 23.2% in the first quarter of 1999.
Cost of license revenue consists primarily of adjustments to bad debt
reserves, product royalty obligations incurred by us when we sublicense tools
provided by third parties, royalty obligations incurred by us under porting
services agreements, user manuals, product media, product packaging and
secondarily of production labor costs and freight. Cost of license revenue
decreased to $114,000 in the first quarter of 2000 compared to $289,000 in the
first quarter of 1999. This decrease was the result of the cost reductions in
all areas mentioned above but primarily due to reduced adjustments for bad debts
and secondarily due to reduced product royalties, tapes, manuals and freight
costs. As a result of these decreased costs, cost of license revenue as a
percentage of license revenues decreased to 2.4% in the first quarter of 2000
from 7.7% in the first quarter of 1999.
Cost of services revenue consists principally of personnel costs associated
with providing consulting, training and technical support work paid for by
customers. The decrease in cost of services revenue to $1.1 million in the first
quarter of 2000 from $1.2 million in the first quarter of 1999, was attributable
to reduced consulting headcount. Cost of services revenue as a percentage of
services revenue increased to 59.4% in first quarter of 2000 compared to 46.9%
in first quarter of 1999, due to lower services revenue. *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 expense
increases. 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. *We believe that the increases in
our e-business initiatives have given rise to substantial increased
opportunities to support our customer base more effectively by offering
additional consulting services, thereby reducing the need for our customers to
find and train additional personnel to implement new e-business applications.
MARKETING AND SALES EXPENSES
Marketing and sales expenses consist primarily of marketing and sales
personnel costs, including sales commissions, recruiting, travel, sales offices,
product descriptive literature, seminars, trade shows, product management,
depreciation, occupancy expense, lead generation and mailings. The decrease in
the first quarter of 2000 to $2.1 million from $3.0 million in the first quarter
of 1999 was primarily the result of reduced headcount and reduced commission
expense and secondarily due to 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 be the goal in 2000. *We expect
marketing and sales expenses to increase, compared to the current quarter, in
absolute dollar terms and as a percent of total sales, due to selective
headcount additions and increased efforts to market our products to new
(e-business) and existing (telco and financial services) business markets.
*However, if we increase our marketing and sales expenditures without
corresponding increases in revenue, our results of operations would be adversely
affected. As a percentage of total revenues marketing and sales expenses
decreased to 32.3% in the first quarter of 2000 from 48.6% in the first quarter
of 1999. This significant decrease in the first quarter of 2000 was primarily
the result of reduced expenses.
12
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries, other
personnel-related expenses, depreciation, the expensing of development
equipment, occupancy expenses, travel and supplies. The decrease to $1.7 million
in the first quarter of 2000 from $2.0 million in the first quarter of 1999
primarily resulted from reduced compensation and other personnel expenses, due
to selective replacement of manpower turnover, and decreases in Soft Mountain
headcount and secondarily due to reduced operating expenses associated with both
the domestic and European (Soft Mountain) 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 e-business efforts as well as ongoing
improvements in our ODBMS products we expect research and development expenses
to increase slightly in 2000, compared to the current quarter results, 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. As a percent of total revenues, research and
development costs were 25.8% in the first quarter of 2000 down from 32.1% in the
first quarter of 1999. The decrease as a percentage of revenues was primarily
due to lower expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of salaries,
recruiting and other personnel-related expenses for our accounting, human
resources, management information systems, legal and general management
functions. In addition, general and administrative expenses include outside
legal, audit and public reporting costs. The increase in the first quarter of
2000 to $917,000 from $806,000 in the first quarter of 1999 was primarily
attributable to increased Nasdaq re-listing fees (from SmallCap to the National
Market), increased compensation expenses and secondarily to increased legal fees
associated with regulatory filings. *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 was
reduced in 1999. *However, if we increase our existing administration
infrastructure without corresponding increases in revenue, our results of
operations would be adversely affected. As a percentage of total revenues
general and administrative costs increased in the first quarter of 2000 to 14.1%
from 12.9% in the first quarter of 1999. The increase as a percentage of
revenues was due to higher expenses.
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. 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. During quarters ended March 31, 2000 and 1999, we amortized
$47,100 and $63,800 respectively. *We will amortize approximately $188,000 of
this remaining goodwill amount in 2000. See note 9 of notes to our consolidated
financial statements in our December 31, 1999 10KSB on file with the SEC.
The acquisition of Soft Mountain in September 1998 resulted in our writing
off $528,000 of in-process research and development expenses associated with the
purchased software and recording 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. 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 addition to goodwill was valued at $149,000 and
will be amortized at a rate of approximately $9,900 per quarter. During quarters
ended March 31, 2000 and 1999, we amortized $71,300 and $61,400 respectively.
*We will amortize approximately $285,000 of this amount in 2000. See note 10 of
notes to our consolidated financial statements in our December 31, 1999 10KSB on
file with the SEC.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1.5 million from $3.7 million at
December 31, 1999 to $2.2 million at March 31, 2000. This decrease was primarily
due to the $1.4 million paydown of our short term revolving credit line.
For the first quarter ended March 31, 2000, our operating activities used
$629,000 of cash and cash equivalents primarily as a result of funding the
increases in our accounts receivables and decreases in accrued liabilities.
These uses of cash were offset in part by depreciation and amortization costs,
net income for the quarter, decreases in prepaid and other assets, increases in
accounts payables and deferred revenues. Investing activities used $139,000 for
the purchase of capital equipment needed for operational activities. Financing
activities used net cash of $611,000 due to the pay down of our revolving line
of credit and regular principal payments on our bank and lease financing
arrangements, offset in significant part by the sale of common stock through the
Company's employee stock purchase and stock incentive plans.
Total assets decreased by 3.9% from $19.2 million at December 31, 1999 to
$18.5 million at March 31, 2000. The decrease in total assets was primarily due
to the reduction in cash, other current and long term assets and net property
and equipment balances as depreciation expense far exceeded the additional
assets added in the first quarter of 2000. These decreases were offset by the
significant increase in accounts receivables.
Total liabilities decreased 20.9% from $10.7 million at December 31, 1999
to $8.4 million at March 31, 2000. This decrease was primarily due to the pay
down of our short term revolving line of credit, reduction of accrued
liabilities, and secondarily to the reduced bank and lease debt partially offset
by increases in accounts payables and net deferred revenue.
Total shareholders' equity increased 17.3% from $8.6 million at December
31, 1999 to $10.1 million at March 31, 2000. This increase primarily results
from the sale of common stock to our employees and the positive quarterly net
income offset partially by the increase in the cumulative foreign exchange
translation adjustment for the quarter.
At March 31, 2000, we had $2.2 million in cash and cash equivalents and
positive working capital of approximately $3.6 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
March 31, 2000 zero borrowings were outstanding. Borrowings 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 interest at
the bank's base lending rate (9.00%, at March 31, 2000 plus 2.0%). The loan
contains certain financial covenants and also prohibits cash dividends and
mergers and acquisitions without the bank's prior approval. In March 2000 we
negotiated new covenants for the year ending December 31, 2000, based on our
forecasted performance in 2000. Certain of these covenants, which the Company
was not in compliance with as of March 31, 2000 have been waived through such
date.
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 in March 1998. Borrowings under the loan are secured by
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 (9.00%, at March 31, 2000 plus 2.5%). The loan
contains certain financial covenants and also prohibits cash dividends and
mergers and acquisitions without the bank's prior approval. In March 2000 we
negotiated new covenants for the year ending December 31, 2000, based on the our
forecasted performance in 2000. Certain of these covenants, which the Company
was not in compliance with as of March 31, 2000 have been waived through such
date.
*We believe that our current cash, cash equivalents, 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 March 31,
2000, our commitments for capital expenditures were not material. *If cash
available to us 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 would 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 a
positive cash flow. Even though we generated a profit in the quarter ending
March 31, 2000, we operated at a net loss of $1.7 million and $19.9 million for
14
<PAGE>
the years ended December 31, 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.
RISK FACTORS
This Form 10-QSB contains forward-looking statements that involve risks and
uncertainties, including, but not limited to, those set forth below, and those
set forth in our Form 10-KSB for the year ended December 31, 1999 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 March 31, 2000, we had $3.6 million of
working capital. To date we have not achieved 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 March
31, 2000, we had $841,000 of bank term debt financing outstanding, of which
$71,000 a month is due and payable. 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 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 March 31, 2000, 15,686,804 shares outstanding
(assuming conversion of all outstanding preferred stock and exercise of all
warrants outstanding), Vertex and its affiliates would own approximately 25.5%
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.
RISKS RELATED TO OUR INDUSTRY
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.
Please refer to our December 31, 1999 10KSB, on file with the SEC, section
labeled "Risk Factors" for a complete description of the risk factors facing our
company.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its present and former officers and directors
were named as defendants in four class action lawsuits filed in the United
States District Court for the Northern District of California, filed on January
26, 1998, February 5, 1998, March 11, 1998 and March 18, 1998, respectively. On
June 19, 1998, a Consolidated Amended Complaint was filed in the above mentioned
court, by the lead Plaintiff named by the court. The amended complaint alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and
Securities and Exchange Commission Rule 10b-5 promulgated under the Securities
Exchange Act, in connection with public statements about the Company's expected
financial performance. The complaint seeks an unspecified amount of damages. The
Company vigorously denies the plaintiffs' claims and has moved to dismiss the
allegations. The Plaintiff has filed a response to the Company's motion to
dismiss and the Company has filed an opposition to Plaintiff's response. The
motion to dismiss was submitted to the court for consideration on November 13,
1998 and the court has not yet issued a decision. Securities litigation can be
expensive to defend, consume significant amounts of management time and result
in adverse judgments or settlements that could have a material adverse effect on
the Company's results of operations and financial condition.
ITEM 2. EXHIBITS AND REPORTS ON FORM 8K
(a)
EXHIBIT NO. EXHIBIT TITLE
27.01 Data Schedule
Financial
(b) None
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERSANT CORPORATION
Date: May 12, 2000 /s/ Gary Rhea
------------ -----------------------------
Gary Rhea
Vice President Finance and Administration.
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal
Financial Officer)
17
<PAGE>
EXHIBIT INDEX
EXHIBIT EXHIBIT TITLE
NUMBER
27.01 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) the
statements of operations and balance sheets and is qualified in its entirety by
reference to such (b) financial statements.
</LEGEND>
<CIK> 000865917
<NAME> Versant Corporation
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 2,177
<SECURITIES> 0
<RECEIVABLES> 9,341
<ALLOWANCES> 435
<INVENTORY> 0
<CURRENT-ASSETS> 11,519
<PP&E> 13,778
<DEPRECIATION> 8,649
<TOTAL-ASSETS> 18,498
<CURRENT-LIABILITIES> 7,939
<BONDS> 0
0
5,662
<COMMON> 49,678
<OTHER-SE> (45,265)
<TOTAL-LIABILITY-AND-EQUITY> 18,498
<SALES> 6,504
<TOTAL-REVENUES> 6,504
<CGS> 1,173
<TOTAL-COSTS> 1,173
<OTHER-EXPENSES> 4,820
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (29)
<INCOME-PRETAX> 463
<INCOME-TAX> 19
<INCOME-CONTINUING> 444
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 444
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.03
</TABLE>
