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 June 30, 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 July 31, 2000: 11,413,249
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
1
<PAGE>
VERSANT CORPORATION
FORM 10-QSB
Quarterly Period Ended June 30, 2000
Table of Contents
Part I. Financial Information
Item 1. Financial Statements Page No.
Consolidated Balance Sheets -- June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations -- Three and Six Months
Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows -- Six Months Ended June 30,
2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8K 19
Signature 20
2
<PAGE>
VERSANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ----------------
(Unaudited) *
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,355 $ 3,663
Accounts receivable, net 9,270 7,278
Other current assets 588 753
--------------- ----------------
Total current assets 12,213 11,694
Property and equipment, gross 14,010 13,639
Accumulated depreciation (9,140) (8,161)
--------------- ----------------
Property and equipment, net 4,870 5,478
Other assets 59 190
Excess of cost of investment over fair value of
net assets acquired 1,636 1,879
--------------- ----------------
Total assets $ 18,778 $ 19,241
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 144 $ 1,400
Current maturities of long-term debt 631 1,240
Current portion of capital lease obligations 80 253
Accounts payable 614 718
Accrued liabilities 2,876 3,405
Deferred revenue 3,225 3,094
--------------- ----------------
Total current liabilities 7,570 10,110
Long-term liabilities, net of current portion:
Deferred revenue 314 416
Capital lease obligations 73 127
--------------- ----------------
Total liabilities 7,957 10,653
Shareholders' equity:
Preferred stock 5,662 5,662
Common stock 49,642 48,528
Accumulated deficit (44,482) (45,627)
Cumulative other comprehensive income (1) 25
--------------- ----------------
Total shareholders' equity 10,821 8,588
--------------- ----------------
Total liabilities and shareholders' equity $ 18,778 $ 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 Six Months Ended
June 30, June 30,
---------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
License $ 4,386 $ 4,867 $ 9,107 $ 8,638
Services 2,419 2,145 4,202 4,624
------------- ------------- -------------- -------------
Total revenue 6,805 7,012 13,309 13,262
------------- ------------- -------------- --------------
Cost of revenue:
License 94 177 208 466
Services 1,031 1,136 2,090 2,298
------------- ------------- -------------- -------------
Total cost of revenue 1,125 1,313 2,298 2,764
------------- ------------- -------------- --------------
Gross profit 5,680 5,699 11,011 10,498
------------- ------------- -------------- -------------
Operating expenses:
Marketing and sales 2,372 2,518 4,475 5,556
Research and development 1,419 1,710 3,093 3,716
General and administrative 930 853 1,847 1,659
Amortization of goodwill 125 106 251 231
------------- ------------- -------------- -------------
Total operating expenses 4,846 5,187 9,666 11,162
------------- ------------- -------------- -------------
Income (loss) from operations 834 512 1,345 (664)
Other expense, net (120) (201) (168) (389)
------------- ------------- -------------- -------------
Income (loss) before provision for
taxes 714 311 1,177 (1,053)
Provision for taxes 14 3 33 9
------------- ------------- -------------- -------------
Net income (loss) $ 700 $ 308 $ 1,144 $ (1,062)
============= ============= ============== =============
Basic net income (loss) per share $ 0.06 $ 0.03 $ 0.10 $ (0.10)
============= ============= ============== =============
Diluted net income (loss) per share $ 0.05 $ 0.03 $ 0.07 $ (0.10)
============= ============= ============== =============
Basic weighted average common shares
and common equivalent shares 11,253 10,146 11,056 10,141
============= ============= ============== =============
Diluted weighted average common shares
and common equivalent shares 15,166 10,177 15,365 10,141
============= ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
VERSANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
JUNE 30,
----------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss) $ 1,144 $ (1,062)
Adjustments to reconcile net income(loss) to net
cash used in operating activities:
Depreciation and amortization 1,222 1,074
Accrued interest on Vertex note - 141
Provision for doubtful accounts 17 242
Changes in operating assets and liabilities:
Accounts receivable (2,009) (2,215)
Prepaid expenses and other current assets 165 799
Deposits and other assets 131 112
Accounts payable (104) (408)
Accrued liabilities and taxes (529) (226)
Deferred revenue 29 418
---------------- ---------------
Net cash provided by(used) in operating activities 66 (1,125)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (370) (10)
---------------- ---------------
Net cash used in investing activities (370) (10)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 1,114 (20)
Principal payments under capital lease obligations (227) (266)
Principal payments of short-term note and bank debt (1,865) (1,316)
---------------- ---------------
Net cash used in financing activities (978) (1,602)
---------------- ---------------
Effect of exchange rate changes on cash (26) (4)
---------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,308) (2,741)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,663 3,564
---------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,355 $ 823
================ ===============
</TABLE>
The accompanying notes are an integral part of these 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, service
and support of high performance data management software for object databases
and middleware infrastructure technology.
The Company is subject to the risks associated with other companies in a
comparable stage of development, as well as risks specific to the Company. These
risks include, but are not limited to, limited working capital, ability to
adequately finance ongoing operations, revenue levels are unpredictable,
fluctuations in operating results, a lengthy sales cycle, customer
concentration, dependence on international operations, securities litigation,
stock price is volatile, stock ownership has become concentrated, competition,
dependence on successful technology development, need to protect our
intellectual property and dependence on key individuals.
To date, the Company has not achieved business volume sufficient to restore
positive cash flow on a year to date basis, however the Company did achieve
positive cash flow of $178,000 for the quarter ended June 30, 2000. The Company
did generate net profits of $700,000 for the second quarter and $1.1 million for
the six month period ended June 30, 2000, but operated at a net loss of $1.7
million and $19.9 million for the years ending 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 upon shipment
of the software if there is no significant modification of the software,
persuasive evidence of an arrangement exists, 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.
6
<PAGE>
Cost of services revenue consists principally of personnel costs associated with
providing training, consulting, technical support and nonrecurring engineering
work paid for by customers.
Earning (Loss) Per Share
The following table presents the calculation of basic and diluted earnings
(loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income(loss) $ 700 $ 308 $ 1,144 ($ 1,062)
Basic:
Weighted average shares of common stock outstanding 11,253 10,146 11,056 10,141
======== ======== ======== ========
Basic earnings (loss) per share $ 0.06 $ 0.03 $ 0.10 $ (0.10)
======== ======== ======== ========
Net income (loss) $ 700 $ 308 $ 1,144 $ (1,062)
Diluted:
Shares used above 11,253 10,146 11,056 10,141
Weighted average common equivalent shares outstanding:
Employee stock options 276 31 348 --
Warrants 1,010 -- 1,157 --
Preferred stock 2,627 -- 2,804 --
-------- -------- -------- --------
Weighted average common equivalent shares outstanding: 15,166 10,177 15,365 10,141
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.05 $ 0.03 $ 0.07 $ (0.10)
======== ======== ======== ========
</TABLE>
Diluted earnings per share was the same as basic earnings per share for the six
months end June 30, 1999 since the effect of any potentially dilutive security
is excluded, as they are anti-dilutive as a result of the Company's net loss.
The total number of shares excluded from the diluted loss per share calculation
relating to these securities was approximately 4,499,738 shares.
4. COMPREHENSIVE INCOME (LOSS)
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive 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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income(loss) $ 700 $ 308 $ 1,144 ($1,062)
Foreign currency translation adjustment 82 (80) (26) (2)
-------- -------- -------- --------
Comprehensive income(loss) $ 782 $ 228 $ 1,118 ($1,064)
======== ======== ======== ========
</TABLE>
7
<PAGE>
5. SEGMENT INFORMATION
In 1998 the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." 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.
The table below presents a summary of operating segments (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues from Unaffiliated Customers
License $ 4,386 $ 4,867 $ 9,107 $ 8,638
Support 1,498 1,335 2,704 2,861
Consulting & Training 921 810 1,498 1,763
-------- -------- -------- ---------
Total Revenue $ 6,805 $ 7,012 $ 13,309 $ 13,262
Distribution Margin
License $ 4,292 $ 4,690 $ 8,899 $ 8,172
Support 1,131 1,007 1,885 2,110
Consulting & Training 257 2 227 216
-------- -------- -------- ---------
Total Distribution Margin 5,680 5,699 11,011 10,498
Profit Reconciliation:
Other Operating Expenses 4,846 5,187 9,666 11,162
Other Income (Expense) (120) (201) (168) (389)
-------- -------- -------- ---------
Income (Loss) Before Provision for Income Taxes $ 714 $ 311 $ 1,177 $ ( 1,053)
======== ======== ======== =========
</TABLE>
8
<PAGE>
The table below presents the Company's revenues by legal subsidiary (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended June
June 30, June 30,
-------------------- ----------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Total Revenues Attributable To:
United States/Canada $ 4,523 $ 3,683 $ 8,282 $ 6,476
Germany 774 714 1,288 2,691
France 574 1,522 1,028 2,291
United Kingdom 639 808 2,182 1,260
Australia/Asia Pacific 295 285 529 544
------- ------- -------- --------
Total $ 6,805 $ 7,012 $ 13,309 $ 13,262
======= ======= ======== ========
</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 SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 and related
interpretations summarize the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. We are required to
apply the guidance in SAB No. 101 to our financial statements no later than our
fourth quarter of fiscal 2000. We currently are reviewing the impact of SAB No.
101 on our revenue recognition policy and the related impact on our consolidated
financial statements. At this time, we do not believe SAB No. 101 will have a
material impact on our financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions involving Stock Compensation - an interpretation of APB
Opinion No. 25". FIN 44 is effective July 1, 2000. The interpretation clarifies
the application of APB Opinion No. 25 for certain issues, specifically, (a) the
definition of an employee, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange or stock compensation awards in a business
combination. We do not anticipate that the adoption of FIN 44 will have a
material impact on our financial position or the results of our operations.
7. LINE OF CREDIT
The Company maintains a revolving credit line with a bank that expires on June
1, 2001. The maximum amount that can be borrowed under the revolving credit line
is $5.0 million. As of June 30, 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 (9.50%,
at June 30, 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, with which the Company was not in compliance as of
June 30, 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.
9
<PAGE>
The loan bears interest at the bank's base lending rate (9.50%, at June 30, 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, with which the Company was not in compliance as of June 30,
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, 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 alleged
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. On May 22, 2000, the Court granted defendants' motion to
dismiss, permitting plaintiffs leave to amend. Plaintiffs filed an amended
complaint on July 7, 2000. The complaint seeks an unspecified amount of damages.
The Company vigorously denies the plaintiffs' claims and intends to move to
dismiss the allegations. 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.
10
<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 Footnote 2 to the financial statements and, "Revenues"
and "Risk Factors" within this Item 2. Please also refer to our December 31,
1999 10KSB on file with the Securities and Exchange Commission, especially the
section labeled "Risk Factors," for additional risks and uncertainties related
to our business. 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
principle products the Versant ODBMS and Versant Enterprise Container ("VEC"),
in 1991 and 1999 respectively. Since that time, our revenues have been derived
from:
1) sales of development, deployment and project licenses for the Versant
ODBMS and VEC
2) sales of the peripheral products for the Versant ODBMS
and VEC
3) related maintenance and support, training, consulting and nonrecurring
engineering fees received in connection with providing services
associated with the Versant ODBMS and VEC and
4) the resale of licenses, maintenance, training and consulting for
third-party products that complement the Versant ODBMS and VEC
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 manage expenses. During the second quarter of 2000, the
Company entered into fifteen separate license agreements, between $100,000 and
$500,000, five of which were in excess of $300,000. *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 $2
million, of second 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 June 30, 2000 was 123 compared to the June 30, 1999
total of 117. *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.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentages that income statement items
compare to total revenue for the three and six months ended June 30, 2000 and
1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
License 64.5% 69.4% 68.4% 65.1%
Services 35.5% 30.6% 31.6% 34.9%
------------ ----------- ------------ -----------
Total revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue:
License 1.4% 2.5% 1.6% 3.5%
Services 15.1% 16.2% 15.7% 17.3%
------------ ----------- ------------ -----------
Total cost of revenue 16.5% 18.7% 17.3% 20.8%
Gross profit 83.5% 81.3% 82.7% 79.2%
Operating expenses:
Marketing and sales 34.9% 35.9% 33.6% 41.9%
Research and development 20.9% 24.4% 23.2% 28.0%
General and administrative 13.6% 12.2% 13.9% 12.5%
Amortization of goodwill 1.8% 1.5% 1.9% 1.8%
------------ ----------- ------------ -----------
Total operating expenses 71.2% 74.0% 72.6% 84.2%
Income (loss) from operations 12.3% 7.3% 10.1% (5.0%)
Other expense, net (1.8%) (2.9%) (1.3%) (2.9%)
------------ ----------- ------------ -----------
Income (loss) before taxes 10.5% 4.4% 8.8% (7.9%)
Provision for taxes .2% - 0.2% 0.1%
------------ ----------- ------------ -----------
Net income (loss) 10.3% 4.4% 8.6% (8.0%)
============ =========== ============ ===========
</TABLE>
REVENUE
Total consolidated revenue decreased 3.0% from $7.0 million in the second
quarter of 1999 to $6.8 million in the second quarter of 2000. This decrease in
total revenue was due to a decrease in license revenues. Total consolidated
revenue increased .4% from $13.2 million for the six month period ending June
30, 1999 to $13.3 million for the corresponding period ending June 30, 2000.
This increase in total revenue was due to an increase in license revenues,
mostly offset by a decrease in service revenue.
License revenue
License revenue decreased 9.9% from $4.9 million in the second quarter of 1999
to $4.4 million in the second quarter of 2000. License revenue increased 5.4% to
$9.1 million for the six month period ending June 30, 2000, from $8.6 million
for the corresponding period in 1999. License revenue decreased in the second
quarter of 2000 to 64.5% of total sales compared to 69.4% in the second quarter
of 1999. License revenue increased for the six month period ending June 30, 2000
to 68.4% of total sales compared to 65.1% for the corresponding period in 1999.
The decrease in second quarter license revenue was due to a decrease in license
revenue in Europe and the increase in license revenue for the six month period
was due to increased license revenues in the first quarter .
12
<PAGE>
Services revenue
Services revenue increased 12.8% from $2.1 million in the second quarter of 1999
to $2.4 million in the second quarter of 2000. This increase was due to
increased maintenance and consulting revenues. Services revenue decreased 9.1%
to $4.2 million, for the six month period ending June 30, 2000, from $4.6
million in the corresponding period in 1999. This decrease was due to first
quarter decreases in both maintenance and consulting revenue.
International revenue
International revenue decreased 31.6% to $2.3 million in the second quarter of
2000 compared to $3.3 million in the second quarter of 1999. International
revenue decreased 26.0% to $5.0 million, for the six month period ending June
30, 2000, from $6.8 million in the corresponding period in 1999. The decrease in
international revenue during 2000 compared to 1999 resulted primarily from lower
sales in Europe. These decreases in international revenues for both periods,
were primarily attributable to the shift from a limited number of high valued
licenses to a greater number of transactions with lower initial value per
license. This result is consistent with the Company's decision to place
increased emphasis on generating recurring revenue opportunities, as opposed to
larger one time licenses. However, there can be no assurances that the license
revenues with lower initial value will result in greater revenue over time. *We
intend to maintain our sales and marketing activities outside the United States,
including Europe, Japan and other Asia/Pacific countries, which will require
significant management attention and financial resources, and which may increase
costs and impact margins unless and until corresponding revenue is achieved.
International revenue as a percentage of total revenue decreased for the second
quarter 2000 to 34% from 48% in 1999 and to 38% for the six month period ending
June 30, 2000 from 51% for the corresponding period in 1999. *Even though the
current periods international revenues decreased compared to prior years
comparable periods, we still expect international revenue to remain a
significant percentage of total revenue.
COST OF REVENUE AND GROSS PROFIT
Total cost of revenue decreased 14.3% to $1.1 million in the second quarter of
2000 from $1.3 million in the second quarter of 1999. Total cost of revenue
decreased 16.9% to $2.3 million for the six month period ending June 30, 2000,
from $2.8 million in the corresponding period in 1999. This decrease was the
result of reduced expenses for consulting services, reduced product royalty
expense and reduced provision for bad debt exposure. Total cost of revenue as a
percentage of total revenues decreased to 16.5% in the second quarter of 2000
and 17.3% for the six month period endedg June 30, 2000 from 18.7% and 20.8%
respectively, in the corresponding periods in 1999.
Cost of license revenue
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 46.9% to
$94,000 in the second quarter of 2000 compared to $177,000 in the second quarter
of 1999. Cost of license revenue decreased 55.4% to $208,000 for the six month
period ending June 30, 2000, from $466,000 for the corresponding period in 1999.
This decrease was the result of reduced provisions for bad debt reserves,
reduced product royalty expenses and reduced costs for tapes, manuals and
freight. As a result of these decreased costs, cost of license revenue as a
percentage of license revenues decreased to 2.1% for the second quarter 2000 and
2.3% for the six month period ending June 30, 2000 compared to 3.6% and 5.4%,
respectively, for the corresponding periods in 1999.
Cost of services revenue
Cost of services revenue consists principally of personnel costs associated with
providing consulting, training, technical support and technical support work
paid for by customers. Cost of services revenue decreased 9.2% to $1.0 million
in the second quarter of 2000 compared to $1.1 million in the second quarter of
1999. Cost of services revenue decreased 9.1% to $2.1 million for the six month
period ending June 30, 2000, from $2.3 million for the corresponding period in
1999. These decreases were attributable to reduced outside professional services
and reduced compensation costs, associated with employee turnover and
compensation plan changes. Cost of services revenue as a percentage of services
revenue decreased to 42.6% for the second quarter 2000 and remained flat at
49.7% for the six month period ending June 30, 2000 compared to 53.0% and 49.7%
respectively, for the corresponding periods in 1999. *We expect
13
<PAGE>
to increase our cost of service revenue in the third and fourth quarter of 2000,
both in absolute dollars as well as a percentage of service revenues, through
selective headcount additions 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 during the rest of 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. Marketing and sales expenses
decreased 5.8% to $2.4 million in the second quarter of 2000 compared to $2.5
million in the second quarter of 1999. Marketing and sales expenses decreased
19.5% to $4.5 million for the six month period ending June 30, 2000, from $5.6
million for the corresponding period in 1999. These decreases were attributable
to reduced expenses associated with marketing programs, facility operations and
employee recruiting. *We expect marketing and sales expenses to increase in the
third and fourth quarter of 2000, compared to the current quarter, in absolute
dollar terms and as a percent of total revenues, due to selective headcount
additions and increased efforts to market our products to new "e-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 34.9% for the second quarter 2000 and 33.6% for the six month
period ending June 30, 2000 compared to 35.9% and 41.9% respectively, for the
corresponding periods in 1999. These decreases in both periods were the result
of reduced expenses.
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. Research and development
expenses decreased 17.0% to $1.4 million in the second quarter of 2000 compared
to $1.7 million in the second quarter of 1999 and decreased 16.8% to $3.1
million for the six month period ending June 30, 2000 compared to $3.7 million
for the corresponding period in 1999. The decrease for both periods primarily
resulted from reduced compensation and other personnel expenses, due to
selective replacement of manpower turnover, and decreases in Soft Mountain
headcount and engineering activity and secondarily due to reduced operating
expenses associated with the domestic 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 in the third and fourth quarter of 2000, compared to the current
quarter results, in absolute dollars and as a percentage of revenues. *However,
if we continue our research and development efforts without corresponding
increases in revenue, our results of operations will 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 as a percentage
of total revenues decreased to 20.9% for the second quarter 2000 and 23.2% for
the six month period ending June 30, 2000 compared to 24.4% and 28.0%
respectively, for the corresponding periods in 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. General and administrative expenses increased 9.0% to
$930,000 in the second quarter of 2000 compared to $853,000 in the second
quarter of 1999 and increased 11.3% to $1.8 million for the six month period
ending June 30, 2000, from $1.7 million for the corresponding period in 1999.
These increases were primarily attributable to increased compensation expenses,
increased Nasdaq re-listing fees (from SmallCap to National Market), and
secondarily to increased 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 the third and fourth quarter of
2000, compared to the current quarter results. 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
14
<PAGE>
results of operations will be adversely affected. As a percentage of total
revenues general and administrative costs as a percentage of total revenues
increased to 13.6% for the second quarter 2000 and 13.9% for the six month
period ending June 30, 2000 compared to 12.2% and 12.5% respectively, for the
corresponding periods in 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 June 30, 2000 and 1999, we amortized
$47,100 for each quarter and $94,200 for the six month period ending June 30,
2000 and 1999, respectively. *We will amortize approximately $94,200 of this
remaining goodwill amount during the balance of 2000.
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 June 30, 2000 and 1999, we amortized $71,100 and $61,200 respectively and
for the six month period ending June 30, 2000 and 1999, we amortized $142,100
and $122,400, respectively. *We will amortize approximately $142,100 of this
remaining goodwill amount during the balance of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1.3 million from $3.7 million at
December 31, 1999 to $2.4 million at June 30, 2000. This decrease was primarily
due to the $1.4 million paydown of our short term revolving credit line.
For the six month period ending June 30, 2000, our operating activities
generated $66,000 of cash and cash equivalents primarily as a result of positive
net income, offset by increases in our accounts receivables and a net decrease
in accrued liabilities and accounts payable. These uses of cash were offset in
part by depreciation and amortization costs. Investing activities used $370,000
for the purchase of capital equipment needed for operational activities.
Financing activities used net cash of $978,000 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 2.4% from $19.2 million at December 31, 1999 to $18.8
million at June 30, 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 exceeded the additional assets added
in the first half of 2000. These decreases were mostly offset by the significant
increase in accounts receivables.
Total liabilities decreased 25.3% from $10.7 million at December 31, 1999 to
$8.0 million at June 30, 2000. This decrease was primarily due to the pay down
of our short term revolving line of credit, reduced bank and lease debt,
reduction of accrued liabilities and reduced accounts payable, offset partially
by increases in deferred revenue.
Total shareholders' equity increased 26% from $8.6 million at December 31, 1999
to $10.8 million at June 30, 2000. This increase primarily results from the sale
of common stock to our employees and the positive first half net income.
At June 30, 2000, we had $2.4 million in cash and cash equivalents and positive
working capital of approximately $4.6 million. We maintain a revolving credit
line with a bank that expires on June 1, 2001. The maximum amount that can be
borrowed under the revolving credit line is $5.0 million. As of June 30, 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 (9.50%, at June 30, 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
15
<PAGE>
December 31, 2000, based on our forecasted performance in 2000. Certain of these
covenants, with which the Company was not in compliance as of June 30, 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 (9.50%, at June 30, 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 our
forecasted performance in 2000. Certain of these covenants, with which the
Company was not in compliance as of June 30, 2000, have been waived through such
date.
*To date, we have not achieved business volume sufficient to restore a
consistent positive cash flow. Although we generated a profit in the six months
ended June 30, 2000, and generated positive cash flow for the quarter ending
June 30, 2000, we operated at a net loss of $1.7 million and $19.9 million for
the years ended December 31, 1999 and 1998. 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 June 30, 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.
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 June 30, 2000, we had $4.6 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. 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 June 30, 2000, 15,858,380 shares outstanding
(assuming conversion of all outstanding preferred stock and exercise of all
warrants outstanding), Vertex and its affiliates would own approximately 25.3%
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
16
<PAGE>
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.
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<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, 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 alleged
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. On May 22, 2000, the Court granted defendants' motion to
dismiss, permitting plaintiffs leave to amend. Plaintiffs filed an amended
complaint on July 7, 2000. The complaint seeks an unspecified amount of damages.
The Company vigorously denies the plaintiffs' claims and intends to move to
dismiss the allegations. 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. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders held on June 22, 2000 the following
matters were approved by the shareholders. Total Shares Outstanding were
12,535,915.
<TABLE>
<CAPTION>
Votes Votes Votes Votes Broker
for Against Abstained Withheld Non-Vote
--------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1) Election of Directors:
David Banks 11,561,421 - - 130,576 -
Nick Ordon 11,562,071 - - 129,926 -
Bernhard Woebker 11,558,235 - - 133,762 -
William Delevati 11,556,921 - - 135,076 -
William Shellooe 11,555,115 - - 136,882 -
2) Ratify and approve amendments to
the Company's 1996 Equity
Incentive Plan made by the Board
of Directors to increase the
number of shares of common stock
reserved for issuance thereunder
by an aggregate of 1,000,000
shares. 4,665,835 566,237 45,870 - 7,257,973
3) Ratification of the appointment of
Arthur Andersen LLP as the
Company's independent auditors for
2000. 11,645,371 29,501 17,125 - 843,918
</TABLE>
18
<PAGE>
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a)
EXHIBIT NO. EXHIBIT TITLE
---------- -------------
10.45 Modification to Loan & Security Agreement dated June 1, 2000
27.01 Financial Data Schedule
19
<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: AUGUST 11, 2000 /S/ Lee McGrath
--------------------------- --------------------------------
Lee McGrath
Vice President Finance and Administration.
Chief Financial Officer, Treasurer
and Secretary
(Duly Authorized Officer and Principal
Financial Officer)
20
<PAGE>
EXHIBIT INDEX
EXHIBIT EXHIBIT TITLE
NUMBER
10.45 -- Modification to Loan & Security Agreement dated June 1, 2000
27.01 -- Financial Data Schedule
21
