-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S21iTbbk2Vk2XQUM9ZnlfKY5yBtc/Epu++1VxFXTXixTq5NTaMaG5g6XvBR2wd2b xFWF8U0bUiUqAvbIXCe5gA== 0000891618-97-001516.txt : 19970401 0000891618-97-001516.hdr.sgml : 19970401 ACCESSION NUMBER: 0000891618-97-001516 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERSANT OBJECT TECHNOLOGY CORP CENTRAL INDEX KEY: 0000865917 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943079392 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 333-04910-LA FILM NUMBER: 97569462 BUSINESS ADDRESS: STREET 1: 41380 WILLOW ROAD CITY: MENLO PK STATE: CA ZIP: 94025 BUSINESS PHONE: 4153297500 10-K405 1 FORM 10-K405 FOR PERIOD ENDING DECEMBER 31, 1996 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB /X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 OR / / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-28540 VERSANT OBJECT TECHNOLOGY CORPORATION (NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-3079392 (STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 1380 WILLOW ROAD MENLO PARK, CALIFORNIA 94025 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 329-7500 Securities registered pursuant to Section 12(b) of the Exchange Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, no par value National Market System of the Nasdaq Stock Market, Inc. Securities registered pursuant to Section 12(g) of the Exchange Act: None Check whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. /X/ Registrant's revenues for the year ended December 31, 1996 were $18,393,000 As of February 28, 1997, there were outstanding 8,793,200 shares of the Registrant's common stock, no par value per share. As of that date, the aggregate market value of the shares of common stock held by non-affiliates of the Registrant (based on the closing price ($10.75) for the common stock on the National Market System of the Nasdaq Stock Market, Inc. on February 28, 1997) was approximately $68,719,955. This excludes 2,400,646 shares of common stock held by directors, officers and shareholders whose ownership exceeded ten percent of the shares outstanding at February 28, 1997. Exclusion of shares held by any person should not be construed to indicate that such person possesses power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or is under common control with the Registrant. DOCUMENTS INCORPORATED BY REFERENCE The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Shareholders of the Company to be held June 5, 1997, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996. Transitional Small Business Disclosure Format (check one): Yes No X 2 VERSANT OBJECT TECHNOLOGY CORPORATION Annual Report on Form 10-KSB For the fiscal year ended December 31, 1996 TABLE OF CONTENTS PART I PAGE Item 1. Description of Business......................................... 1 Item 2. Properties...................................................... 12 Item 3. Legal Proceedings............................................... 12 Item 4. Submission of Matters to a Vote of Security Holders............. 12 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................................. 13 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 14 Item 7. Financial Statements ........................................... 22 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................. 22 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act............... 23 Item 10. Executive Compensation.......................................... 23 Item 11. Security Ownership of Certain Beneficial Owners and Management.. 23 Item 12. Certain Relationships and Related Transactions.................. 23 Item 13. Exhibits and Reports on Form 8-K................................ 23 Financial Statements...................................................... F-1 i 3 PART I. ITEM 1. DESCRIPTION OF BUSINESS This "Description of Business" includes a number of forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements are subject to certain risks and uncertainties, including those discussed in this Annual Report on Form 10-KSB, including in "Other Factors That May Affect Future Operating Results" in Item 6 and the "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in the Company's Form SB-2 Registration Statement declared effective by the SEC on July 17, 1996, that could cause actual results to differ materially from historical results or those anticipated in the forward-looking statements. The Company has identified with a preceding asterisk ("*") various sentences within this section of the Annual Report which contain such forward looking statements, and words such as "believes", "expects", "may", "intends", and similar expressions are intended to identify forward-looking statements; however, neither the preceding asterisk nor these words are the exclusive means of identifying such statements. The Company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that may arise after the date of this report. Versant Object Technology Corporation ("Versant" or the "Company") designs, develops, markets and supports high performance object database management systems for commercial applications in distributed computing environments. The Company's core product is the Versant Object Database Management System (the "Versant ODBMS"), a highly scalable database management system that combines native support for object-oriented languages with high performance database functionality and a client-server architecture. The Versant ODBMS enables users to store, manage and distribute information that the Company believes often cannot be supported effectively by traditional database technologies, including abstract data such as graphics, images, video, audio and unstructured text, and dynamic, highly interrelated data such as networks, advanced financial instruments and distributed, rapidly changing content in Internet/Intranet applications. The Company also provides object-oriented programming language interfaces, database query tools, application development tools and legacy database access tools, and has a product in Beta test designed to enable end-users to emulate a live database session using Web browsers. In addition, the Company offers a variety of services, including training, consulting and technical support, to assist users in developing and deploying applications based on the Versant ODBMS. The Versant ODBMS has been licensed for development and/or deployment by approximately 600 customers including AT&T, Alcatel Network Systems, EDS, Genuity (a Bechtel Company), HNC Software, Lucent, MCI, Motorola, SABRE Decision Technologies, Scotiabank, Siemens Medical Systems, Sprint, Spyglass, Texaco and TRW. The Company is a leading provider of object database management systems to the telecommunications industry, where its products are used in strategic distributed applications such as network modeling and management, fault diagnosis, service activation and assurance and customer billing. The Company has experienced increased customer acceptance in other vertical markets, such as the market for Internet/Intranet applications and the financial services, health care and energy markets. These markets are similar to the telecommunications market in their increasing need for high performance support for distributed applications involving abstract data types and dynamic, highly interrelated information. INDUSTRY BACKGROUND Organizations are under increasing pressure to manage and adapt to the forces of accelerating change and growing complexity. The combined demands of global competition, deregulation and organizational restructuring, as well as rapid changes in products and markets and a proliferation of new technologies, increasingly complicate business operations. These pressures fall especially heavily on corporate information systems, which must model this complexity, support increasingly distributed operations and manage new types of information that are more diverse, interrelated and dynamic. In attempting to respond to these pressures, traditional information technologies are being stretched to deliver solutions for which they were neither designed nor intended. This is particularly true in the areas of software programming and database management, where existing technology paradigms date back to the 1970s or earlier. The "structured programming" approach, which still dominates most software development, requires reduction of a business problem to a series of segmented procedures that are implemented line by line to build large, monolithic software programs. This approach can be slow and error-prone, and often produces software programs that are costly to maintain and difficult to change. The Company believes that as much as 60% of existing programming resources 1 4 can be consumed in maintaining older, legacy systems that cannot be efficiently evolved. These limitations have led a number of industry observers to declare a "crisis" in software development. A newer approach to software development, object-oriented programming, responds to many of these limitations. Object-oriented programming languages, such as C++, Smalltalk and Java, enable software developers to realistically model the complexities of large scale, dynamic systems, and to develop, maintain and evolve complex programs more quickly and at a higher level of quality than is often possible using structured programming. As a result, the Company believes that object-oriented programming languages are increasingly being used by software developers. While object-oriented technology can address many software development problems, it places new demands on existing database management systems, most of which were designed to operate with traditional programming methodologies and simpler types of data in centralized environments. The hierarchical and relational database management systems now prevalent were developed at a time when data processing operations were highly structured and performed on centralized mainframe platforms. These systems perform well with simple types of data (such as text and numbers) and static relationships. However, businesses are increasingly required to deploy database management systems that can effectively manage the problems and conditions listed below: Abstract Data Types. Abstract data, including graphics, images, video, audio and unstructured text, often combined in one application, are proliferating in business applications and on the Internet. Complex Data Relationships. Telecommunications networks, Internet/Intranet applications, health care systems, customer support systems, airline reservation systems and logistics management often involve complex relationships among thousands of rapidly changing items. Constant Change. Business rules, data relationships, technology and information are constantly changing, requiring information systems and applications that can be quickly deployed and flexibly evolved to adapt to changes while maintaining overall system quality and data integrity and while keeping the system in service. Highly Distributed Data. Complex, interrelated, constantly changing data may be created in or distributed to dozens or hundreds of locations around the world, and must be carefully managed to maintain integrity yet be available on demand to many users on different platforms. The growth of the Internet and the World Wide Web as mainstream computing and communication platforms compounds these challenges. The Internet incorporates new types and combinations of dynamic, abstract data, and involves a complex array of relationships among users, service and content providers, data sources and information repackagers and resellers. This computing environment is inherently distributed and dynamic and is evolving at a rapid pace. The use of the Internet for transactional applications and internal corporate Intranets is accelerating this complexity, further increasing demand for new software and database technologies. Companies are increasingly seeking to integrate Internet and Intranet applications with corporate databases, but the abstract multimedia information and complex, changing data relationships prevalent in these applications are not easily accommodated by hierarchical or relational databases. Database management systems have evolved through several generations of technology, each responding to the data processing demands of its time but limited in its ability to address new problems effectively. The first on-line data management technologies indexed and stored data in a computer's file system and provided database access to only one user at a time. These file systems are extremely fast for single-user applications but are impractical when multiple users need access to common data. Hierarchical databases, such as IBM's IMS, and network databases enable multiple programs and users to process very large volumes of similarly structured data, often in large batch operations. While these databases provide high speed performance for such tasks as processing bank records, phone bills and insurance information, they are relatively inflexible, and are often inefficient in handling abstract data types and complex dynamic relationships. The application programs developed for these systems are in many cases over 20 years old, and can be difficult and costly to maintain and error-prone when modified. However, because they are well suited for certain applications, hierarchical and network databases remain in wide use today. Relational database management systems ("RDBMSs") were developed in the 1970s to address the inflexibility of hierarchical and network databases. They were used initially to perform ad hoc queries and later for on-line transaction processing and decision support systems. An RDBMS stores data in a series of two-dimensional tables and defines relationships between data by connecting rows and columns and linking multiple tables. Complex queries are performed by indexing multiple tables and then "joining" them to create a different view of the data. RDBMSs are 2 5 adept at handling simple types of information, such as alphanumeric data, and managing static relationships, such as that between a part number and an invoice. They are less effective in managing more abstract data types, such as graphics, video and audio, which they must "decompose" into a series of two-dimensional tables and then re-compose when needed, or must store as isolated binary large objects that do not support analysis, manipulation or relationships to other data. In addition, RDBMSs are relatively inefficient when used to manage complex relationships because of the inherent burden of indexing and joining multiple two-dimensional tables. This performance burden can significantly lengthen response times and is compounded when users seek to maintain data on more than one server in a distributed environment because data must be transmitted to a central server where these joins can be performed. The burden is increased as applications become more complex and information more interrelated. As a result, the Company believes that RDBMSs cannot provide the level of performance required by many users for a growing number of complex distributed applications. Relational database vendors have attempted to address some of the shortcomings of RDBMSs by "extending" their support for abstract data types with object-relational approaches. An example of one approach is the Informix Universal Server, which requires a type of extension called a "data blade" for each data type stored. These data blades perform the operation of helping the relational engine understand data types not intended for relational storage. However, the Universal Server uses a relational "kernel" or core engine in which processing is performed by indexing and joining two-dimensional tables to model and manage multi-dimensional or highly interrelated data. While the Company believes that the use of data blades can improve relational performance, the Company also believes that the performance of object-relational systems is limited by its two-dimensional kernel architecture. The Company also believes that the decision of relational database vendors to pursue object-relational or object-oriented approaches validates the Company's belief that object-oriented database solutions will be increasingly demanded by business organizations. For the foregoing reasons, the Company believes today's business organizations need to manage abstract data types as well as complex dynamic relationships in a vastly more distributed environment and that this need is often not effectively addressed by hierarchical, network, relational and object-relational database management systems. THE VERSANT SOLUTION The Versant ODBMS is a database management system that combines native support for object-oriented languages with high performance database functionality and a client-server architecture. The Versant ODBMS is designed to meet commercial users' requirements for high performance, scalability, reliability and compatibility with heterogeneous computing platforms and legacy information systems. The Versant ODBMS provides users with the following benefits: Management of Abstract Data Types. The Versant ODBMS allows users to store and manage a wide range of abstract information, such as images, video, audio and unstructured text, as well as traditional types of alphanumeric data. Nearly any kind of information that can be digitized can be stored as an object in the Versant ODBMS, while maintaining the application-defined behavior and relationships of the objects. Language-Independent Support for Object-Oriented Programming. The Versant ODBMS provides native support for the leading object-oriented software development languages -- C++ and Smalltalk, and, using an interface currently in field trials, Java. This support facilitates rapid and flexible development, maintenance and evolution of complex, dynamic applications that closely model real-world systems and processes. Objects developed in these languages are directly stored in the Versant ODBMS. In addition, the Versant ODBMS is language-independent, allowing objects written in one object-oriented language to interoperate with objects written in another object-oriented language. High Performance. The Versant ODBMS architecture provides direct access (navigation) to stored objects. Its balanced client-server architecture enhances performance by efficiently distributing processing burdens between the client and the server to leverage the processing power of networked computers. As a result, certain customers running complex applications involving highly interrelated data on the Versant ODBMS have reported up to a hundred-fold improvement in performance compared to RDBMSs running similar applications. Highly Scalable Support for Distributed Computing. The Versant ODBMS architecture is designed to support the transparent integration of up to 65,000 separate databases in one network, distributed over a range of hardware and software platforms. Each of these databases has a theoretical storage capacity of 4.6 million terabytes, an amount far beyond the actual capacity of most existing operating systems. Through object-level operations and other design 3 6 features, the Versant ODBMS can be scaled from small workgroup operations to thousands of users over wide area networks or the Internet. Reliability, Availability and Serviceability. The Versant ODBMS offers a number of features designed to permit continuous operation, including features providing on-line backup and recovery and on-line modification of the database system, as well as system utilities that can operate while the system is running. These features, together with replication and disk mirroring provided by the Company's Fault Tolerant Server, support operations 24 hours per day, 365 days per year in environments such as airline reservation, telecommunications network or commercial banking systems, where it is critical that the database be continuously available. Support for Three-Tier Architectures. Traditional two-tier architectures are adequate for closely coupled client-server environments but become unwieldy in large, distributed systems. The Versant ODBMS supports three-tier architectures, in which application logic resides as a middle layer between clients and data stores. This architecture insulates data from constant change, allows an end-user or application to locate data across multiple databases and improves the productivity and quality of application development and maintenance. Integration with Users' Existing Information Systems. The Versant ODBMS operates on a wide range of client and server platforms, including industry-leading UNIX platforms from Sun Microsystems, Hewlett-Packard, IBM, Digital Equipment Corporation and Silicon Graphics, as well as Microsoft's Windows 3.1, Windows 95 and Windows NT platforms and IBM's OS/2 platform. Objects can be readily accessed and stored by any combination of these platforms in a heterogeneous network. In addition, Versant-based applications can interoperate with information stored in relational database management systems, enabling such applications to complement RDBMS strengths in structured applications. These compatibilities allow users to protect their existing investments in databases and information systems while migrating newer systems to object-oriented platforms. STRATEGY Versant's objective is to be the leading provider of object management solutions for commercial applications in distributed information systems. Key elements of the Company's strategy to achieve this objective include the following: Extend Technology Leadership. The Company's strategy is to leverage its knowledge and expertise in object database management systems for distributed commercial applications. The Company believes that its product architecture includes a number of important technological advances and that this technological leadership is essential to its continued ability to compete effectively. *The Company intends to extend its leadership position by continuing to invest in internal research and development, establishing strategic relationships with leading providers of complementary technologies and integrating the Versant ODBMS with products offered by third parties. Leverage Strength in Telecommunications to Other Vertical Markets. The Company is a leading provider of object database management solutions to the telecommunications market, where its products are used in such strategic, distributed applications as network modeling and management, fault diagnosis, service activation and assurance and customer billing. The Company believes that its experience and success in this demanding market positions it to address other vertical markets such as financial services, health care and energy. These markets are similar to the telecommunications market in their increasing reliance on large networks and need for high performance support for abstract data types and for distributed, complex applications involving dynamic, highly interrelated information. Capitalize on the Internet/Intranet Market Opportunity. The Company believes that the growth of the Internet and Intranets as computing environments will significantly expand the market opportunity for the Company's object database management technology. Internet/Intranet computing environments and applications are highly distributed and are increasingly becoming more complex, requiring highly scalable, high performance database systems as their infrastructure. In addition, Internet/Intranet applications increasingly incorporate abstract data types and are increasingly being addressed by object-oriented programming languages such as C++, Smalltalk and Java. As a result, the Company believes that its product architecture and its telecommunications experience position it to capitalize upon the Internet/Intranet market. Certain of the Company's customers, including EDS, Genuity, Primus and Spyglass, are using the Company's technology to develop and/or deploy Internet/Intranet applications designed to enhance the performance of Internet/Intranet infrastructures. *The Company intends to continue working with partners to improve the performance of Internet/Intranet infrastructures, although there can be no assurance that the 4 7 Company and/or its partners or customers will be successful in developing solutions that enhance the performance of such infrastructures. Expand Distribution Channels. *The Company intends to expand both its direct and indirect distribution channels by hiring additional direct sales personnel and recruiting additional VARs, distributors and other resellers. *As familiarity with object-oriented technology and awareness of the Company's products increase, the Company believes that it will be able to increase its use of indirect sales channels to address a broader market and to capitalize on resellers' integration capabilities. In addition, the Company believes that international markets present attractive opportunities, particularly as telecommunications and other industries face increasing change and competitive pressures worldwide. *The Company intends to continue to expand its international distribution network and foreign direct sales operations to capitalize on these opportunities, and in March 1997 the Company exercised its option to acquire Versant Object Technology GmbH, its independent, German-based European distributor ("Versant Europe"). Enable Customers to Implement a Complete Solution. The Company believes that its object database management systems can provide customers with a foundation upon which they can build a broader object-oriented environment that includes development language interfaces, object request brokers, class libraries and tools for the development of applications and interfaces and for the integration of existing data and applications. In addition to the Versant ODBMS, the Company currently provides object-oriented programming language interfaces, database query tools, application development tools for use with the Versant ODBMS and legacy database access tools, and has a product in Beta test designed to enable end-users to emulate a live database session using Web browsers. *The Company intends to expand the breadth of its product offerings through internal development efforts and through marketing, licensing and other relationships with providers of complementary technologies and other market participants. The Company believes that by providing its customers with a more complete solution, it can facilitate their adoption of object-oriented technology and expand the use and value of its products. Increase Penetration of Current Customer Base. The Company seeks to generate incremental, recurring revenue from its installed base of customers. A customer's successful development of an application under a development license can lead to additional revenue from deployment licenses. The scalability of the Versant ODBMS enables customers to add end-users, providing additional license revenue to the Company as customers expand their use of the product. The adaptability of the Versant ODBMS to a wide range of applications allows customers who have successfully implemented the Versant ODBMS for one function to develop applications for other functions. PRODUCTS AND SERVICES The Company's core product is the Versant ODBMS, a high performance object database management system. In addition, the Company offers object-oriented programming language interfaces, database query tools, application development tools and legacy database access tools, and has a product in Beta test designed to emulate a live database session using Web browsers. Customers licensing the Versant ODBMS receive the database engine with one object-oriented programming language interface and a set of integrated database utilities. For additional fees, customers may obtain additional programming language interfaces, and users requiring continuous operation in mission-critical environments can license the Versant Fault Tolerant Server. The Company offers a variety of services to assist customers in the design, development and management of their database applications, including training, consulting and custom development services. Products Versant ODBMS. The Versant ODBMS is designed to support multi-user, commercial applications in distributed environments. Its balanced client-server architecture enables the system to process a wide variety of abstract data types and complex applications in a highly concurrent, high performance manner. The product is designed to integrate over 65,000 databases connected over a like number of locations on a variety of hardware and software platforms. Each database has a theoretical storage capacity of 4.6 million terabytes, an amount far beyond the actual capacity of most existing operating systems. The Company believes that the customer applications developed to date have used only a small portion of this theoretical capacity. The Versant ODBMS implements a variety of database features, including two-phase commits for distributed transaction integrity and database triggers to monitor changing events and data and to notify users and applications when specified events occur. In addition, on-line management utilities enable routine maintenance to be performed while the database is running. These include utilities to perform backup operations, manage log files, dynamically evolve database schema, add, delete and compact volumes on disk storage and related functions. These utilities provide multiple levels of administrative access and application security. With version 5.0 of the Versant ODBMS (released in March 1997), Versant provides substantial additional 5 8 performance and scalability features, including multi-threaded database client and server and multi-session client capabilities, logging and memory management enhancements and full operations on Symmetric Multi-Processing server computers. In combination, these new features enhance the ability of the Versant ODBMS to support massive centralized or distributed computing infrastructures. Programming Language Interfaces. The Versant ODBMS implements an object model that is a superset of the capabilities of C++, Smalltalk and Java. The interfaces to these object-oriented languages make the database appear to be a natural and transparent extension of the language. The Smalltalk interface supports both IBM VisualAge and ParcPlace VisualWorks Smalltalk environments. Programs written in any of these languages can use objects written in another, allowing integration of corporate data stores regardless of application development language. In 1996, the Company substantially completed development of the Versant Java Direct Interface, which is currently in Beta test on Solaris platforms, and the Company is currently completing development work to port this interface to other platforms. In addition, the Company provides a C language interface. Fault Tolerant Server. For continuous operation in mission critical environments, the Company offers the Versant Fault Tolerant Server. This product ensures transparent failure recovery by connecting database clients to synchronized copies of the database stored on physically separate computers. If one of the databases fails due to operating system failure, hardware breakdown or other interruption, the other database continues operation without application interruption. When the failed database is restored, the two databases automatically resynchronize and resume operations without application interruption. Internet/Intranet Products. Customers are using the Versant ODBMS to develop and/or deploy Internet/Intranet applications including demographic analysis, vertical shopping kiosks, multi-organization decision making and transaction management. The Company currently has two new products in Beta test that are designed specifically to enable the Versant ODBMS to provide enhanced support for advanced Internet and Intranet applications. One product, Versant Web, is designed to emulate a live database session using commercially available Web browsers. The second, the Versant Java Direct Interface, allows Internet application developers to write Java applications directly to the Versant ODBMS. Certain of the Company's customers are also using Versant technology to create applications designed to improve the performance of Internet/Intranet infrastructures. The Company's ability to successfully evolve its new products from Beta test to commercial release is subject to a number of risks and uncertainties, and no assurances can be given regarding the timing of such commercial releases or the functionality that will ultimately be provided in any commercially available new product. Data Access and Integration Tools. The Versant ODBMS allows users a choice of access methods for querying and manipulating data in the Versant ODBMS and to obtain data from relational databases. With the Versant SQL Suite, the Company offers Open Database Connectivity ("ODBC") capability and Structured Query Language ("SQL") access to data stored in relational databases using industry-standard off-the-shelf query and reporting tools. These tools permit customers to retain their investments in legacy systems while addressing new applications with the productivity, flexibility and performance characteristics available through object technology. Application Development Tools. In 1994, Versant entered into an agreement with Miramar Technology S.A. de C.V. ("Miramar") for joint development and marketing of Miramar's Argos development tool, which Versant marketed as Versant ARGOS. Effective December 31, 1996, the agreement with Miramar expired and was not renewed. In Tools.H++, the Company has developed a product enhancement integrating the Versant ODBMS with C++ class libraries from Rogue Wave and is negotiating a license from Rogue Wave to allow the Company to resell the Rogue Wave class libraries to its customers. Licensing and Pricing. The Company licenses its products directly to end-users principally through three types of licenses -- development licenses, deployment server licenses and deployment client licenses. The development license is sold on a "per seat" basis and authorizes the customer to develop an application program that uses the Versant ODBMS. Before a customer may deploy an application, it must purchase at least one deployment server license and one deployment client license for each computer connected to the server that will run the application using the database. If the customer wishes to install several copies of the application, separate deployment licenses are required for each server computer and each client that will run the particular application. The Company also licenses its products on a project basis, where the customer simultaneously purchases development and deployment licenses for an entire project. List prices of a development license currently range from $1,500 to $9,000. List prices of server deployment licenses currently range from approximately $2,000 for a single user database to over $300,000 for an application 6 9 with 200 concurrent users. List prices of client deployment licenses vary from $350 to $2,000 per client, depending on the platform. The Company provides alternative pricing for "non-interactive" environments where the product is deeply embedded in a component, such as a telephone switch, and does not have "end users." The Company licenses the Fault Tolerant Server and Versant SQL Suite options, and, following completion of Beta testing, expects to license the Versant Java Direct Interface and Versant Web options. License fees to customers may vary from list prices depending on a number of factors. Sales through distributors generally involve a significant discount to list prices. Prices for project licenses will vary with the scope and nature of the underlying project. A typical VAR develops an application incorporating the Versant ODBMS and then licenses the application to its customer. VARs purchase development licenses from the Company on a per seat basis on terms similar to those of development licenses sold directly to end-users. VARs are authorized by the Company to sub-license deployment copies of the Versant ODBMS, together with the VAR's application, to end-users. Deployment license pricing for sales through VARs generally is based either on a percentage of the total price charged by the VAR to its end-user customers or are based on a percentage of the Company's list prices. Services The Company offers a variety of services to assist customers in the design, development and management of their database applications. Training is offered in a variety of Versant-specific and object-related technologies and ranges from beginning to advanced levels. Consulting services are available for analysis and design assistance, mentoring and technical transfer, application coding, design reviews and performance analysis. In addition, the Company provides custom development services to customers who request unique or proprietary product extensions. These services may be performed by third-party integrators, consultants or the Company, depending on the nature and complexity of the request. Maintenance and technical support services are available at an annual fee typically equal to 15% of the list price of the software. Maintenance and support contracts, which typically have twelve-month terms, are offered concurrently with the initial license of a Company product and entitle the customer to telephone support and to product and documentation updates. For additional fees, customers may purchase a special support package providing a dedicated support engineer, and may obtain telephone support available 24 hours per day. All maintenance contracts are renewable annually. CUSTOMERS AND APPLICATIONS As of December 31, 1996, the Versant ODBMS had been licensed by approximately 600 customers for development and/or deployment in a wide range of applications. Many of these customers have licensed multiple copies for use in different applications. Sales to MCI Telecommunications, Sprint and Versant Europe each represented at least ten percent of the Company's total revenue in 1996. In any given quarter, it is typical for a relatively small number of customers to constitute a significant percentage of the Company's total revenue. In addition, in 1995 and 1996, 51% and 62%, respectively, of the Company's total revenue were attributable to sales of products and services to telecommunications companies. *The Company's future performance will depend in significant part on the continued growth of the use of ODBMSs in telecommunications applications and the acceptance of the Company's products within the telecommunications industry. The failure of ODBMSs or the Company's products to perform favorably in and become an accepted component of telecommunications applications, or a slower than expected increase or a decrease in the volume of sales of the Company's products and services to telecommunications companies, could have a material adverse effect on the Company. The following examples illustrate how selected organizations are using the Versant ODBMS. Telecommunications. A major telecommunications equipment manufacturer uses the Versant ODBMS to provide an open, integrated and scalable network management system. This network management system, designed for telecommunication service providers, uses the Versant ODBMS to model thousands of high performance, intelligent network elements, such as switches and routers, as well as their relationships to one another and permits storage of the entire network topology and all of its interdependencies as objects in the Versant ODBMS. Complex network management analysis and decision-making can be accomplished in significantly less time using the Versant ODBMS rather than traditional database management system ("DBMS") technologies. For example, when a network element failure occurs, many traditional systems can require that a network administrator, through a number of relatively lengthy processes, manually query multiple network elements to ascertain where the failure occurred and assess the impact on the remainder of the network. Using the network management system developed with the Versant ODBMS, 7 10 a network administrator is automatically notified of the location of the failure and the network elements and relationships affected. The network management system's use of the Versant ODBMS also facilitates rapid assimilation of new software configurations and improvements. System administrators can easily and transparently incorporate technological improvements into the network management system by modifying existing objects or incorporating new objects, or can reconfigure the system to reflect changes in the network. Internet. Abstract data types are at the heart of many Internet applications. A large technology integrator used the Versant ODBMS to build a large multimedia asset management systems so that users from the film, advertising, news media and publishing industries can access over 250 gigabytes of on-line video and film archives over a variety of broadband networks. The system allows users to enter a number of different search criteria including spatial, temporal and action characteristics and to quickly review video or film clips that conform to the requested parameters. Using an RDBMS for this application would have required the decomposition of objects into tables, severely affecting performance and development time. Another company, a leading supplier of web servers, is working with Versant to improve search performance for users inside corporate firewalls. A number of leading Internet service providers are also working with Versant on projects that reduce network bandwidth limitations and reduce network latency related to web site update. Health Care. Like telecommunications, health care is undergoing rapid change. Deregulation, new technologies and market forces place increasing pressures on a broad range of health care providers to change the way that they manage clinical, financial and administrative information. Many health care providers are replacing decades-old stand-alone information systems with more capable, networked systems that allow multiple providers to share patient information quickly and economically. One software developer, in cooperation with a major pharmaceutical manufacturer and managed care provider, used the Versant ODBMS to build a "Health Objects Framework," a reusable set of business objects that holds all patient records, both clinical and financial, and permits access in a distributed environment regardless of health plan, primary care physician, pharmacy or patient care facility. The Company believes that this system is contributing to significant reductions in cost, reduced occurrence of errors and faster cycle times by integrating clinician-generated prescriptions with patient records at pharmacies to avoid manual screening for drug interaction and overmedication problems. The Company believes that this system also is improving efficiency at long-term care facilities by automating supply reordering and thereby eliminating costly paper processes. MARKETING AND SALES The Company markets and sells the Versant ODBMS in the United States principally through its direct sales force and VARs and internationally through its distributors, direct sales force and VARs. Direct Sales. As of December 31, 1996, the Company's direct sales organization consisted of 31 employees based at the Company's corporate headquarters in Menlo Park, California and at its offices in New York City, New York; Chicago, Illinois; Loveland, Colorado; Dallas, Texas; Alpharetta, Georgia; Bridgewater, New Jersey; Columbia, Maryland; and Milsons Point, Australia. The direct sales organization includes a telesales force that supports the Company's field sales personnel, maintenance renewals and handles smaller orders. The direct sales organization also includes systems engineers who are able to answer technical questions and assist customers in running benchmarks against competitive products and developing prototype applications. In 1995 and 1996, sales by the Company's direct sales force (including sales to VARs) accounted for over 90% and 89%, respectively, of the Company's total revenue. Indirect Sales. An important part of the Company's sales strategy is the development of indirect distribution channels, such as VARs, systems integrators and foreign distributors. Typical VARs build application programs in which they embed a deployment copy of the Versant ODBMS. Systems integrators may include the Company's products with those of others to provide a complete solution to their customers. Foreign distributors include Versant Europe as well as distributors based in Japan, France, Italy and Israel. VARs are typically not subject to any minimum purchase or resale requirements and can cease marketing the Company's products at any time. Certain VARs, distributors and systems integrators also offer competing products that they produce or that are produced by third parties. Marketing. The Company conducts marketing programs intended to position and promote its products and services, including direct mail, advertising, seminars, trade shows, public relations and distribution of product literature. The Company also maintains a Web site where prospective customers can obtain general information about its products, services and distribution partners. Marketing personnel provide price lists and product descriptive materials, including white papers, and assist the direct sales force in their efforts through lead generation and sales 8 11 training. The marketing department also has a leading role in product marketing activities, including product management, cooperative positioning and long-term product direction. Sales Process. Due in part to the strategic nature of certain Versant ODBMS applications and magnitude of the associated hardware, networking, software and consulting expenditures, potential customers are typically cautious when making product acquisition decisions. For these and other reasons, the sales cycle for the Company's products to new customers often exceeds six months and may extend to a year or more. However, for existing customers with successful deployed applications, sales cycles for new products may not be as long. During the sales cycle, meetings involving both technical and management staff are frequently conducted at the customer's site and at the Company's headquarters. The Company faces significant competition in the DBMS marketplace, and prospective customers typically perform a detailed technical evaluation or benchmark of the Versant ODBMS and, often, competitive products, as a part of the selection process. Upon completion of the evaluation, the customer may purchase one or more development licenses for the team of programmers that will build the application. Additionally, the customer may order maintenance, training courses and assistance from the Company's consultants. While the customer can purchase a deployment license at the same time as it purchases a development license, or can purchase a project license that covers development and deployment for an entire project, most customers defer their purchase of a deployment license and related maintenance until they complete application development (a process that typically takes at least six months and can exceed one year) and then decide to deploy the application. There can be no assurance that any particular customer will complete the development of an application successfully, or that, upon completion of development, the customer will decide to deploy the Versant ODBMS. As additional users are added to a system, the customer purchases additional deployment licenses, without further deliveries from the Company, providing additional revenue over an extended period at relatively low incremental cost to the Company. Depending on the application type and the customer size, it is possible for the price of a customer's deployment licenses to substantially exceed the price of its earlier development licenses. Sales of Third Party Products. In order to enhance the functionality of the Versant ODBMS, the Company has offered certain products licensed from third parties, which are generally offered only in combination with the Versant ODBMS and are not currently material to the Company's business. The Company's software is typically shipped to customers shortly after the execution of a license agreement and upon the Company's receipt of the order. As a result, the Company typically does not have a material backlog of unfilled license orders at any given time, and the Company does not consider backlog to be a meaningful indicator of future performance. RESEARCH AND DEVELOPMENT *The Company has committed, and expects to continue to commit, substantial resources to its research and development efforts. The Company's current development efforts are focused on improving performance and scalability of the Versant ODBMS within large-scale run-time environments and enhancing product functionality to meet customer needs. These efforts include the support of new object-oriented software development languages, tools and industry standards, the development of interfaces specifically designed for the storage and dissemination of complex, non-traditional information on the Internet and Intranets and the development of tools to provide improved database query capability and legacy database integration. Research and development expenses were approximately $2.1 million, $2.0 million and $3.3 million in 1994, 1995 and 1996, respectively. To date, substantially all research and development expenditures have been expensed as incurred. The Versant ODBMS has, to date, been almost entirely developed by the Company's research and development personnel. The Company's development team consisted of 30 full-time employees as of December 31, 1996, most of whom are software engineers with significant experience in such technologies as object-oriented software development, relational database technology, platform engineering, design and integration and large-scale run-time environments. The Company selectively supplements its internal staff with outside consultants having expertise in specific areas. The Company's future success will depend on its ability to attract, train and retain highly skilled research and development personnel. Competition for such personnel is intense, especially the competition for personnel familiar with object-oriented technology. *The Company expects that such competition will continue for the foreseeable future and may intensify. *The Company believes that its future results will largely depend on its ability to improve its current technologies and to develop new products and product enhancements on a timely basis. The market for the Company's products and services is characterized by changing customer demands, rapid technological change and frequent introductions 9 12 of new products and product enhancements. Customer requirements for products can change rapidly as a result of innovations or changes within the computer hardware and software industries, the introduction of new products and technologies (including new hardware platforms and programming languages) and the emergence, evolution or widespread adoption of industry standards. The actual or anticipated introduction of new products, technologies and industry standards can render existing products obsolete or unmarketable or result in delays in the purchase of such products. As a result, the life cycles of the Company's products are difficult to estimate. *The Company has in the past experienced delays in the introduction of new products and features, and may experience such delays in the future. If the Company is unable, for technological or other reasons, to develop new products or enhancements of existing products in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results and financial condition will be materially adversely affected. New products or new versions of existing products may, despite testing, contain undetected or unresolved errors or bugs that will delay their introduction or adversely affect their commercial acceptance, which could have a material adverse effect on the Company's business, operating results and financial condition. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary technology. For example, the Company licenses its software pursuant to signed license agreements and, to a lesser extent, "shrink-wrap" licenses displayed in product packaging, which impose certain restrictions on the licensee's ability to utilize the software. In addition, the Company seeks to avoid disclosure of its trade secrets, including requiring those persons with access to the Company's proprietary information to execute confidentiality agreements with the Company and restricting access to the Company's source code. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company presently has no patents but has one patent application pending. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products, obtain or use information that the Company regards as proprietary or use or make copies of the Company's products in violation of license agreements. Policing unauthorized use of the Company's products is difficult. In addition, the laws of many jurisdictions do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. In particular, "shrink-wrap" licenses may be wholly or partially unenforceable under the laws of certain jurisdictions, and copyright and trade secret protection for software may be unavailable in certain foreign countries. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. To date, the Company has not been notified that its products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim that the Company's current or future products infringe such rights. The Company expects that developers of object-oriented technology will increasingly be subject to infringement claims as the number of products, competitors and patents in the Company's industry segment grows. Any such claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. The Company's future success will depend in part on the Company's ability to integrate its products with those of vendors providing complementary products. The Versant ODBMS must be integrated with compilers, development tools, operating systems and other software and hardware components to produce a complete end-user solution. There can be no assurance that the Company will receive the support of these third-party vendors, some of which may compete with the Company, to integrate the Company's products with the vendors' products. COMPETITION The market for the Company's products is intensely competitive and highly fragmented. The Company believes that the primary competitive factors in its market include database performance (including the speed at which operations can be executed and the ability to support large amounts of different information), vendor reputation, the ability to handle abstract data types and more complex data relationships, ease of use, database scalability, the 10 13 reliability, availability and serviceability of the database, compatibility with customers' existing technology platforms and the ease and speed with which applications can be developed, price and service and support. The Company's current and prospective competitors include companies that offer a variety of database solutions using various technologies including object database, object-relational database and relational database technologies. Competitors offering object and object-relational database management systems include Object Design, Inc., Informix and its Illustra Information Technologies, Inc. subsidiary, Objectivity, Inc., Gemstone Systems, Inc., Poet Software Corporation, O2 Corp., ONTOS, Inc., and Fujitsu America, Inc. In addition, the Company's products compete with traditional relational database management systems, many of which have been or are expected to be modified to incorporate object-oriented interfaces and other functionality. The principal competitors in the relational database market are Oracle, Sybase, Informix, IBM and Microsoft. *The Company expects to face additional competition from other established and emerging companies as the object database market continues to develop and expand. New or enhanced products introduced by existing or future competitors could increase the competition faced by the Company's products, and each of Informix, IBM, Microsoft and Oracle has either announced the development of, or has introduced, enhanced versions of its principal database products that are intended to improve the performance or expand the capabilities of its existing products to support object-oriented applications. In addition, Computer Associates has announced its acquisition of object database management technology and its intention to offer an ODBMS product. Although the Company believes that the decision of relational database vendors to pursue object-relational or object-oriented approaches validates the Company's belief that object-oriented database solutions will be increasingly demanded by today's business organizations, the heightened competition that the Company expects to face could result in fewer customer orders, price reductions, reduced transaction size, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition and on the market price of the Company's Common Stock. The Company believes that the Versant ODBMS is currently more expensive than typical RDBMSs, and there can be no assurance that the Company will be able to maintain prices for its products at levels that will enable the Company to market its products profitably. Any decrease in per unit prices, as a result of competition or otherwise, could have a material adverse effect on the Company's business, operating results and financial condition. Many of the Company's competitors have longer operating histories, significantly greater financial, technical, marketing, service and other resources, significantly greater name recognition, broader product offerings and a larger installed base of customers than the Company. In addition, many of the Company's competitors have well-established relationships with current and potential customers of the Company. As a result, the Company's competitors may be able to devote greater resources to the development, promotion and sale of their products, may have more direct access to corporate decision-makers based on previous relationships and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on its business, operating results and financial condition. EMPLOYEES As of December 31, 1996, the Company had a total of 103 employees, 98 of whom were based in the United States and 5 of whom were based in Australia. Of the total, 51 were engaged in engineering and technical services, 41 were engaged in sales and marketing and 11 were engaged in administration and finance. None of the Company's employees is represented by a labor union with respect to his or her employment by the Company. The Company has experienced no organized work stoppage to date, and believes that its relationship with its employees is good. *The Company's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel. The loss of the services of one or more of the Company's key employees could have a material adverse effect on the Company's business, operating results and financial condition. *The Company's future success also depends on its continuing ability to attract, train and motivate highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, especially in Silicon Valley where the Company's headquarters are located, and there can be no assurance that the Company will be able to attract, train and motivate such personnel. 11 14 ITEM 2. PROPERTIES The Company's principal administrative, sales, marketing and research and development facility occupies approximately 16,875 square feet in Menlo Park, California under a lease that expires in August 1997. In February 1997, the Company signed a 10-year lease for a facility under construction of approximately 54,000 square feet in Fremont, California that it expects to occupy prior to the expiration of its current facility lease and after completion of exterior and interior improvements. The Company believes that the Fremont facility will be adequate for its requirements for several years. The Company also leases space for sales offices, generally under one year operating lease agreements, in New York City, New York; Chicago, Illinois; Loveland, Colorado; Dallas, Texas; Bridgewater, New Jersey; Alpharetta, Georgia; Columbia, Maryland; and Milsons Point, Australia. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12 15 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information for Common Stock The Company's common stock is traded on the National Market System of the Nasdaq Stock Market, Inc. ("Nasdaq") under the symbol "VSNT." The Company completed its initial public offering on July 18, 1996. Prior to July 18, 1996, there was no public trading market for the Company's Common Stock. The following table reflects the range of high and low sales prices of the Company's Common Stock for the last two quarters of 1996. This information is based on closing prices as reported by Nasdaq.
1996 HIGH LOW ---- --- Third Quarter*................ $27.625 $ 8.000 Fourth Quarter................ $24.000 $15.875
* Commencing July 18, 1996 Stockholders As of February 28, 1997, there were approximately 206 shareholders of record of the Company's Common Stock. The Company believes that a significant number of beneficial owners of its Common Stock hold their shares in street name. Based on information available to the Company, the Company believes it has at least 500 beneficial shareholders of its Common Stock. Dividends The Company has neither declared nor paid cash dividends on its Common Stock in the past. The Company intends to retain future earnings, if any, to fund development and growth of its business and, therefore, does not anticipate that it will declare or pay cash dividends on its Common Stock in the foreseeable future. 13 16 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes a number of forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements are subject to certain risks and uncertainties, including those discussed in this Annual Report on Form 10-KSB, including in "Other Factors That May Affect Future Operating Results" below, and in the Company's Form SB-2 Registration Statement declared effective by the SEC on July 17, 1996, that could cause actual results to differ materially from historical results or those anticipated in the forward-looking statements. The Company has identified with a preceding asterisk ("*") various sentences within this section of the Annual Report which contain such forward looking statements, and words such as "believes", "expects", "may", "intends", and similar expressions are intended to identify forward-looking statements; however, neither the preceding asterisk nor these words are the exclusive means of identifying such statements. The section entitled "Other Factors That May Affect Future Operating Results," which has a substantial number of forward-looking statements, has not been asterisked for improved readability. The Company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that may arise after the date of this report. The following table presents Statement of Operations Data for the five years ended December 31, 1996.
Year Ended December 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: (in thousands, except per share data) Revenue: License $ 12,202 $ 7,810 $ 5,649 $ 2,485 $ 837 Services 6,191 4,067 2,590 3,526 2,997 -------- -------- -------- -------- -------- Total revenue 18,393 11,877 8,239 6,011 3,834 -------- -------- -------- -------- -------- Cost of revenue: License 1,144 1,062 930 276 116 Services 2,987 2,258 1,563 906 2,193 -------- -------- -------- -------- -------- Total cost of revenue 4,131 3,320 2,493 1,182 2,309 -------- -------- -------- -------- -------- Gross profit 14,262 8,557 5,746 4,829 1,525 -------- -------- -------- -------- -------- Operating expenses: Marketing and sales 8,327 6,319 5,710 4,060 4,444 Research and development 3,323 2,048 2,063 2,334 2,611 General and administrative 1,501 1,419 1,093 1,098 1,094 -------- -------- -------- -------- -------- Total operating expenses 13,151 9,786 8,866 7,492 8,149 -------- -------- -------- -------- -------- Income (loss) from operations 1,111 (1,229) (3,120) (2,663) (6,624) -------- -------- -------- -------- -------- Interest income and other, net 429 70 117 131 270 Income (loss) before taxes 1,540 (1,159) (3,003) (2,532) (6,354) -------- -------- -------- -------- -------- Provision for income taxes 129 73 56 99 19 -------- -------- -------- -------- -------- Net income (loss) $ 1,411 $ (1,232) $ (3,059) $ (2,631) $ (6,373) ======== ======== ======== ======== ======== Net income per share $ 0.18 ======== Pro forma net loss per share (1) $ (0.21) ======== Shares used in per share calculations 7,781 5,933 ======== ========
(1) See Note 2 of Notes to Financial Statements for an explanation of the determination of pro forma net loss per share. 14 17 OVERVIEW Versant was incorporated in August 1988 and commenced commercial shipments of its principal product, the Versant ODBMS, in 1991. Since that time, substantially all of the Company's revenue has been derived from (i) sales of development and deployment licenses for the Versant ODBMS, (ii) related maintenance and support, training, consulting and nonrecurring engineering fees (the "Associated Services") and (iii) the resale of licenses, maintenance, training and consulting for third-party products that complement the Versant ODBMS ("Third-Party Products"). The Company released Version 4.0 of the Versant ODBMS in July 1995 and released Version 5.0 in March 1997. *The Company currently expects that licenses of the Versant ODBMS and peripheral products, including the Versant SQL Suite, the Versant Java Direct Interface and Versant Web, and Associated Services will be the Company's principal sources of revenue for the foreseeable future. *As a consequence, the Company's future operating results will depend upon its ability to expand market acceptance of the Versant ODBMS. *A significant portion of the Company's total revenue has been, and the Company believes will continue to be, derived from a limited number of orders placed by large organizations. *The timing of such orders and their fulfillment has caused, and likely will continue to cause, material fluctuations in the Company's operating results, particularly on a quarterly basis. In 1995 and 1996, three customers accounted for approximately 43% and 49% of the Company's total revenue, respectively. Further, in 1995 and 1996 approximately 50% and 62%, respectively, of the Company's total revenue was derived from customers in the telecommunications industry. *The Company expects that sales to telecommunications customers will continue to represent a majority of the Company's total revenue in 1997. However, there can be no assurance that the Company will earn comparable revenue from these customers or this industry in future periods. The Company licenses its products directly to end-users principally through three types of licenses -- development licenses, deployment server licenses and deployment client licenses. Development licenses are sold on a "per seat" basis and authorize the customer to develop an application program that uses the Versant ODBMS. Before a customer may deploy an application, it must purchase at least one deployment server license and one deployment client license for each computer connected to the server that will run the application using the database management system. If the customer wishes to install several copies of the application, separate deployment licenses are required for each server computer and each client that will run the particular application. Pricing of the Versant ODBMS varies according to several factors, including the computer platform on which the application will run and the number of users that will be able to access the server at any one time. For certain applications, the Company offers deployment licenses priced on a "per user" basis. The Company also licenses its products on a project basis, where the customer simultaneously purchases development and deployment licenses for an entire project. *The Company believes that project licenses will represent an increasing portion of its licenses in the future. *Although project licenses reduce the risk that a given customer will not purchase deployment licenses after purchasing development licenses, the total license fee paid for a project license may be less than the Company would have received had the customer purchased development and deployment licenses separately. *Additionally, the Company's increasing use of project licenses may also result in the Company recognizing revenue earlier than it might have otherwise. VARs purchase development licenses from the Company on a per seat basis, on terms similar to those of development licenses sold directly to end users. VARs are authorized by the Company to sub-license deployment copies of the Versant ODBMS, together with the VAR's application, to end-users. Deployment license pricing for sales through VARs generally represents either a percentage of the total price charged by the VAR to its end-user customers or a percentage of the Company's list prices. The Company's development and deployment license agreements and agreements with VARs typically require the payment of a nonrefundable, one-time license fee for a license of perpetual term. Revenue from perpetual license agreements is recognized upon shipment of the software if no significant vendor obligations remain, payments are due within the Company's normal payment terms and collection of the resulting receivable is deemed probable. In instances in which a significant vendor obligation exists, revenue recognition is delayed until such obligation has been satisfied. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Maintenance revenue is recognized ratably over the term of the maintenance contract, which is typically twelve months. Training and consulting revenue is recognized when a customer's order has been received and the services have been performed. The Company has entered into contracts with certain of its customers that require the Company to perform development work in return for nonrecurring engineering fees. Revenue related to such nonrecurring engineering fees generally is recognized using the percentage-of-completion method of accounting. Amounts received from customers under certain license, maintenance and nonrecurring engineering agreements involving significant continuing obligations of the Company are included on the Company's balance sheet as deferred revenue. 15 18 The Company sells the Versant ODBMS and peripheral products, Associated Services and Third-Party Products primarily through its direct sales force to end-user customers and VARs and, to a lesser extent, through foreign distributors. Through late 1993, the Company focused its sales efforts on developing indirect sales channels and contracting for nonrecurring engineering fees from its marketing partners. In late 1993, the Company changed its sales strategy to a direct sales model and began increasing the size of its direct sales force. In 1995 and 1996, sales by the Company's direct sales force (including sales through VARs) accounted for more than 90% and 89%, respectively, of the Company's total revenue. During 1995, the Company entered into an agreement with ISAR-Vermogensverwaltung Gbr mbH ("ISAR"), an entity formed by a group of European investors, pursuant to which ISAR organized and funded Versant Europe. Versant provided Versant Europe with exclusive European distribution rights for the Company's products, subject to the rights of existing distributors, and with management responsibilities for Versant's existing distributors in Europe. In March 1997, the Company exercised its option to acquire Versant Europe. *This acquisition, in which Versant will pay approximately $3.6 million in cash and stock, will be accounted for as a purchase. In 1996, which was Versant Europe's first full year of operations, Versant Europe had revenues of $1.4 million and a net loss of $1.9 million. The Company received $1.9 million in revenue and royalties from Versant Europe in 1996. As of February 28, 1997, Versant Europe had 28 employees and consultants. Since inception, the Company has invested significant resources in developing the Versant ODBMS and in building the Company's sales, marketing, consulting and administrative organizations. *The Company expects to hire additional personnel in all of these functional areas and increase its promotion and selling expenditures during 1997. The labor market in which the Company operates is highly competitive, and there can be no assurance that key employees can be employed or retained without substantial increases in the Company's operating expenses. 16 19 RESULTS OF OPERATIONS The following table sets forth certain statement of operations data expressed as percentages of total revenue for the periods indicated:
Year Ended December 31, -------------------------------- 1996 1995 1994 ---- ---- ---- Revenue: License 66.3% 65.8% 68.6% Services 33.7 34.2 31.4 ------ ------ ------ Total revenue 100.0 100.0 100.0 Cost of revenue: License 6.2 9.0 11.3 Services 16.3 19.0 18.9 ------ ------ ------ Total cost of revenue 22.5 28.0 30.2 Gross margin 77.5 72.0 69.8 Operating expenses: Marketing and sales 45.3 53.2 69.3 Research and development 18.1 17.2 25.0 General and administrative 8.1 12.0 13.3 ------ ------ ------ Total operating expenses 71.5 82.4 107.6 Income (loss) from operations 6.0 (10.4) (37.8) ------ ------ ------ Interest income and other, net 2.4 0.6 1.4 Income (loss) before taxes 8.4 (9.8) (36.4) Provision for income taxes 0.7 0.6 0.7 ------ ------ ------ Net income (loss) 7.7% (10.4)% (37.1)% ====== ====== ======
Revenue Total revenue increased 44% from $8.2 million in 1994 to $11.9 million in 1995 and an additional 55% to $18.4 million in 1996. License revenue increased 38% from $5.6 million in 1994 to $7.8 million in 1995 and an additional 56% to $12.2 million in 1996. The increase in license revenue during 1995 compared to 1994 was attributable principally to a larger and more experienced direct sales force as well as the release of Version 4.0 of the Versant ODBMS in July 1995. The increase in license revenue during 1996 compared to 1995 was attributable principally to an increased number of license sales, significant revenue from deployment licenses sold to several telecommunications companies and sales to Versant Europe. In addition, in 1996, Versant began receiving revenues from the Internet/Intranet market. *The Company expects license revenue to increase in 1997 in absolute dollar terms due to increased license purchases by telecommunications, Internet/Intranet and other customers, and the receipt of gross revenues, rather than royalties, from the sale of licenses by Versant Europe, as a result of the acquisition of Versant Europe. *The Company also believes that license revenue as a percentage of total revenue will remain flat or increase in 1997 compared to 1996. However, due to risks highlighted in the section, "Other Factors That May Affect Future Operating Results," below, there can be no assurance that license revenue will increase or remain level, in absolute dollar terms or as a percentage of total revenue, in 1997 when compared to 1996. Services revenue increased 57% from $2.6 million in 1994 to $4.1 million in 1995 and an additional 52% to $6.2 million in 1996. The increase in services revenue during 1995 compared to 1994 was attributable principally to increased maintenance revenue from a larger installed base, substantial growth in the Company's training and consulting business with end-user customers and nonrecurring engineering fees from two porting contracts with large end-user customers. The increase in services revenue during 1996 compared to 1995 was attributable principally to increased maintenance revenue from a significantly larger installed base and substantial growth in training and consulting revenue, offset in part by a decrease in nonrecurring engineering fees. *The Company expects services revenue to increase in absolute dollar terms, attributable principally to increased maintenance and training and 17 20 consulting revenue; and for services revenue to remain flat or decline as a percentage of total revenue in 1997. Due to risks highlighted in the section, "Other Factors That May Affect Future Operating Results," below, there can be no assurance that services revenue will increase in absolute dollar terms, or remain flat or decrease as a percentage of total revenue, in 1997 when compared to 1996. Export revenue decreased by 5% from $3.7 million in 1994 to $3.5 million in 1995 and then increased by 20% to $4.2 million in 1996. The decrease in export revenue during 1995 compared to 1994 resulted from the conclusion of nonrecurring engineering contracts with international OEMs in 1994. The increase in export revenue during 1996 compared to 1995 resulted primarily from higher sales to Versant Europe and Australia. *The Company intends to continue to expand its sales and marketing activities outside the United States, which will require significant management attention and financial resources. The Company's export sales are currently denominated predominantly in United States dollars. However, an increase in the value of the United States dollar relative to foreign currencies could make the Company's products more expensive and, therefore, less competitive in foreign markets. The Company believes that the increase in the value of the United States dollar relative to foreign currencies in 1996 did not have a material effect on the Company's operating results. *As the Company increases its international sales, its total revenue will be affected to a greater extent by seasonal fluctuations resulting from lower sales levels that typically occur during the summer months in Europe and other parts of the world. Export revenue as a percentage of total revenue decreased from 45% in 1994 to 30% in 1995 to 23% in 1996. *With the Company's recent decision to acquire Versant Europe and the Company's increased emphasis on international sales, the Company expects export revenue to increase as a percentage of total revenues; however, there can be no assurance that export revenue will grow faster than domestic revenue, if at all. Cost of Revenue Total cost of revenue increased by 33% from $2.5 million in 1994 to $3.3 million in 1995 and increased an additional 24% to $4.1 million in 1996. Cost of license revenue consists primarily of product royalty obligations incurred by the Company when it sub-licenses Third-Party Products, royalty obligations incurred by the Company under a porting services agreement, product packaging, freight, user manuals, product media, production labor costs and reserves for estimated bad debts. Cost of license revenue increased by 14% from $930,000 in 1994 to $1.1 million in 1995 and remained level at $1.1 million in 1996. The increases in cost of license revenue during 1995 compared to 1994 were principally attributable to overall growth in license revenue. Cost of license revenue during 1996 compared to 1995 remained level as costs related to overall growth in license revenue and additions to bad debt reserves were offset by reduced royalty obligations from lower sales of Third Party Products. *The Company believes, based on its decision not to renew its relationship with Miramar and its reduced reliance on Third Party Products due to the integration of additional functionality into version 5.0 of the Versant ODBMS and related peripheral products, Versant SQL Suite, Versant Java Direct Interface and Versant Web, that its royalty obligations will not be significant in 1997 and that cost of license revenue will decrease as a percentage of license revenue. However, there can be no assurance that the Company will not seek licenses for other Third Party Products in the future, which may require the Company to pay royalties to third parties, which could cause cost of license revenue to increase as a percentage of license revenue. Cost of services revenue consists principally of personnel costs associated with providing training, consulting, technical support and nonrecurring engineering work paid for by customers. These costs increased by 44% from $1.6 million in 1994 to $2.3 million in 1995 and an additional 32% to $3.0 million in 1996. The increase during 1995 compared to 1994 was attributable principally to increased training and consulting business, as well as costs associated with a large nonrecurring engineering project, a significant portion of which was performed by a subcontractor. The increase during 1996 compared to 1995 was attributable principally to a significant increase in training and consulting business, as well as costs associated with customer support activities to service a growing customer base offset by a reduction in subcontractor cost. *The Company expects that cost of services revenue as a percentage of services revenue will remain flat in 1997 given the relatively fixed nature of the cost and revenue components of additional maintenance and training and consulting projects. *However, the Company may experience increased compensation pressure as a result of the intense demand for managers and engineers in Silicon Valley. *If such compensation pressures result in increased compensation expense to the Company and the Company is not able to increase the fees the Company charges for maintenance and training and consulting projects, whether as a result of competitive pressures, restrictions in contractual provisions regarding Associated Services or otherwise, the Company's cost of services revenue would increase as a percentage of services revenue. 18 21 Operating Expenses Marketing and Sales. Marketing and sales expenses consist primarily of marketing and sales personnel costs, including sales commissions, recruiting and travel, advertising, public relations, seminars, trade shows, lead generation, product descriptive literature, product management, sales offices, mailings and depreciation expense. Marketing and sales expenses increased by 11% from $5.7 million in 1994 to $6.3 million in 1995 and by an additional 32% to $8.3 million in 1996. The increase during 1995 compared to 1994 was principally attributable to the costs of recruiting new executives for marketing and sales functions and increased compensation and other costs of a larger direct sales force. The increase during 1996 compared to 1995 was from costs associated with higher compensation including increased sales commissions related to increased revenue, increased costs of the Company's annual sales training conference and the expansion of the direct sales force. *Although marketing and sales expenses decreased as a percentage of total revenue in 1996 compared to 1995, the Company expects that marketing and sales expenses will at least remain flat and may increase as a percentage of total revenue as the Company continues to expand its direct sales force and to promote the use of the Company's technology in the Internet/Intranet market, and as a result of the acquisition of Versant Europe. Research and Development. Research and development expenses consist primarily of salaries, recruiting and other personnel-related expenses, depreciation of development equipment, supplies and travel. Research and development expenses decreased slightly from $2.1 million in 1994 to $2.0 million in 1995 and increased by 62% to $3.3 million in 1996. The decrease during 1995 compared to 1994 was principally the result of reduced overall Company overhead and also the percentage of that overhead allocated to research and development. The increase during 1996 compared to 1995 resulted primarily from increases in compensation, recruiting expense associated with headcount growth allotted to new product development and costs of consultants used to supplement the efforts of Company software engineers in porting the Company's products to additional platforms, and increased depreciation, amortization and equipment expense, as well as the cost of initiating the Company's ISO 9000 training and certification program. The Company believes that a significant level of research and development expenditures is required to remain competitive and complete products under development. *Accordingly, the Company anticipates that it will continue to devote substantial resources to research and development. To date, nearly all research and development expenditures have been expensed as incurred. General and Administrative. General and administrative expenses consist primarily of salaries, recruiting and other personnel-related expenses for the Company's accounting, human resources, management information systems, legal and general management functions. In addition, general and administrative expenses include outside legal, audit and public reporting costs. General and administrative expenses increased 30% from $1.1 million in 1994 to $1.4 million in 1995 and a small additional amount to $1.5 million in 1996. The increase during 1995 compared to 1994 resulted from the cost of litigating an intellectual property matter settled during 1995 as other general and administrative expenses in the aggregate remained relatively unchanged. The small increase during 1996 compared to 1995 was attributable principally to higher compensation, liability insurance and other public company reporting costs, recruiting, publications, printing and maintenance costs offset by lower legal fees resulting from the 1995 settlement of litigation as well as lower depreciation and equipment costs. *Although general and administrative expenses decreased as a percentage of total revenue in 1996 when compared to 1995, the Company expects general and administrative expenses to increase as a percentage of total revenue in 1997, principally attributable to the administration and finance costs that will be incurred following the acquisition of Versant Europe, increased costs associated with the Company's status as a public company and increased costs incurred in connection with the Company's move to a new and larger facility. Interest Income and Other, Net Interest income represents income earned on the Company's cash, cash equivalents and short-term investments. Interest income declined from $134,000 in 1994 to $75,000 in 1995, and then increased to $367,000 in 1996 as a result of proceeds from the Company's initial public offering and other cash balances being available for investment during the last two quarters of 1996. In 1996, the Company also received proceeds of $120,000 from the settlement of a contractual dispute. Interest expense, which partially offset interest income in each of 1994, 1995 and 1996 and is principally related to leases of capital equipment and bank loans, was $17,000 in 1994, $5,000 in 1995 and $58,000 in 1996. Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The Company incurred net operating losses in 1994 and 1995 resulting in no federal or state tax payments based on income. The Company had net income of $1.4 million for 1996 and has 19 22 provided an income tax provision of $129,000 for anticipated federal and state income taxes of $115,000 not covered by net operating loss carryforwards and federal withholding taxes of $14,000. The Company also paid foreign withholding taxes during 1994 and 1995, which are included within the income tax provision but were not material in any given year. At December 31, 1996, the Company had federal and state net operating loss carryforwards of $17.0 million and $5.4 million, respectively, and tax credit carryforwards of $1.1 million, all of which expire through 2010. *Due to the Company's history of operating losses through 1995 and other factors, the Company believes that there is sufficient uncertainty regarding the realizability of these carryforwards, and therefore a valuation allowance of approximately $8.2 million has been recorded against the Company's net deferred tax assets of approximately $8.2 million. Management will continue to assess the realizability of the tax benefits available to the Company based on actual and forecasted operating results. Due to the "change in ownership" provisions of the Internal Revenue Code of 1986, the availability of net operating loss carryforwards and tax credit carryforwards to offset federal taxable income in future periods is subject to an annual limitation if a change in ownership for income tax purposes should occur. A change in ownership of the Company occurred in 1992, and again, as a result of the Company's initial public offering, in 1996, and the Company's ability to utilize its net operating loss carryforwards and credit carryforwards available on those dates was restricted. Earnings Per Share The Company's earnings per share for 1996 was $0.18. This was based on a weighted average outstanding number of shares of 7,781,000. This weighted average number reflects the fact that the shares issued in the company's initial public offering were only outstanding for approximately half of the year. The Company had 8,719,000 shares outstanding as of December 31, 1996. *In connection with the acquisition of Versant Europe, the Company expects to issue approximately 167,545 shares of Common Stock to the owner of Versant Europe in March 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of liquidity during the last two quarters of 1996 was the $14.9 million in equity financing received from its initial public offering of Common Stock. The Company's primary sources of liquidity during 1994, 1995 and the first two quarters of 1996 were through private sales of equity securities and, to a much lesser extent, capital equipment leases and a bank line of credit. The Company's operating activities provided $2.9 million in net cash during 1996 primarily as a result of profitable operations and increases in deferred revenue principally from sales of maintenance, partially offset by an increase in accounts receivable balances. The Company used $3.2 million during 1994 and $2.2 million in net cash in operations during 1995, primarily to fund operating losses and to finance increases in accounts receivable. In 1994, 1995 and 1996, the Company purchased property and equipment of $316,000, $354,000 and $697,000, respectively, consisting primarily of computer workstations, desktops, laptops and computer software used for product development, product demonstrations, customer benchmarks, customer support and administrative activities. *In 1997, the Company expects purchases of property and equipment to increase as a result of the Company's move to a new and larger headquarters, for which the Company may be obligated to pay certain construction costs, and to a lesser extent, due to the Company's projected increase in personnel. At December 31, 1996, the Company had $20.0 million in cash, cash equivalents and short-term investments and approximately $18.9 million in working capital. The Company also maintains a revolving credit line with a bank that expires in June 1997. The maximum amount that can be borrowed under the revolving credit line is $2.5 million. Borrowings under the revolving credit line are limited to 80% of eligible accounts receivable and subject to the Company meeting certain net profit and tangible net worth tests. These borrowings bear interest at a rate of 1/2% over the bank's prime lending rate. The loan agreement contains certain financial covenants and also prohibits cash dividends and mergers and acquisitions without the bank's prior approval. At December 31, 1996, the Company's commitments for capital expenditures were not material. *The Company believes that its current cash, cash equivalent and short-term investment balances, its lines of credit and the net cash generated by operations, if any, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next twelve months. *If cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may seek additional debt or equity financing. There can 20 23 be no assurance that such financing will be available on terms acceptable to the Company. The sale of additional equity or convertible debt securities could result in dilution to the Company's shareholders. *A portion of the Company's cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, the Company evaluates potential acquisitions of such businesses, products or technologies. The Company has no current plans, agreements or commitments (except with respect to its acquisition of Versant Europe) with respect to any acquisition, and the Company is not currently engaged in any negotiations with respect to any such transaction. *In connection with the acquisition of Versant Europe, the Company expects to pay the owner of Versant Europe $2.0 million in cash in March 1997. OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS This Annual Report on Form 10-KSB contains forward-looking statements that involve risks and uncertainties, including, but not limited to, those set forth below, that could cause actual results to differ materially from those in the forward-looking statements. The matters set forth below should be carefully considered when evaluating the Company's business and prospects. The Company's operating results have varied significantly in the past and are expected to vary significantly in the future, on a quarterly and annual basis, as a result of a number of factors, many of which are outside of the Company's control. These factors include domestic and foreign demand for the Company's products and services, particularly in the telecommunications, Internet/Intranet and financial services markets, the size, timing and structure of significant license purchases by customers, the decisions of significant customers regarding whether to deploy the Versant ODBMS on a large scale basis, new product introductions by the Company and its competitors, the ability of relational and object-relational database vendors to extend the capabilities of their existing products to support object-oriented applications, the publications of opinions about the Company and its competitors and their respective products, changes in pricing policies by the Company or its competitors and customer order deferrals in anticipation of product enhancements or new product offerings by the Company or its competitors. The Company's expense levels are relatively fixed and are based in significant part on expectations of future revenue. Consequently, if revenue levels are below expectations, net income is likely to be disproportionately adversely affected. A number of other factors make it impossible to predict the Company's operating results for any period prior to the end of that period. The Company's software is typically shipped to a customer shortly after the Company's receipt of the customer's order, and consequently, order backlog at the beginning of any quarter has in the past represented little or none of that quarter's expected license revenue. As a result, license revenue in any quarter is substantially dependent on orders booked and shipped in that quarter. Historically, a majority of the Company's total revenue in any quarter has been recorded in the third month of that quarter, with a concentration of such revenue in the last few days of that quarter, and the Company expects this trend to continue. A significant portion of the Company's total revenue has been, and the Company believes will continue to be, derived from a limited number of orders placed by large organizations, and the timing of such orders and their fulfillment has caused, and is likely to cause in the future, material fluctuations in the Company's operating results, particularly on a quarterly basis. For example, in 1996, one customer accounted for 28% of the Company's total revenue, and the Company's three largest customers accounted for 49% of the Company's total revenue. The Company's sales cycle, which varies substantially from customer to customer, often exceeds six months and can extend to a year or more. Due in part to the strategic nature of the Company's products and associated expenditures, potential customers are typically cautious in making product acquisition decisions. The decision to license the Company's products generally requires the Company to provide a significant level of education to prospective customers regarding the uses and benefits of the Company's products, and the Company must frequently commit pre-sales support resources, such as assistance in performing bench marking and application prototype development. Because of the lengthy sales cycle and the relatively large average dollar size of individual licenses, a lost or delayed sale could have a significant impact on the Company's operating results for a particular period. Moreover, to the extent that significant sales occur earlier than expected, operating results for the subsequent quarters may be adversely affected. For example. a substantial portion of the licenses purchased by the Company's largest customer in 1996 are for non-specified future use, and accordingly, the amount of revenue that the Company receives from such customer in 1997, if any, may be adversely affected by the pre-existing license rights already owned by such customer. Many of the Company's competitors have longer operating histories, significantly greater financial, technical, marketing, service and other resources, significantly greater name recognition, broader product offerings and a larger installed base of customers than the Company. In addition, many of the Company's competitors have well-established 21 24 relationships with current and potential customers of the Company. Recently, some of the Company's larger competitors appear to be directing larger amounts of resources to the object-oriented database area. For example relational database vendors have attempted to address some of the shortcomings of RDBMSs by "extending" their support for abstract data types with object-relational approaches. An example of one approach is the Informix Universal Server, which requires a type of extension called a "data blade" for each date type stored. These data blades perform the operation of helping the relational engine understand data types not intended for relational storage. The Company expects to face additional competition from other established and emerging companies as the object database market continues to develop and expand. Increased competition could result in fewer customer orders, price reductions, reduced transaction size, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. In 1995 and 1996 approximately 51% and 62% respectively, of the Company's total revenues were derived from customers in the telecommunications industry. The Company's future performance will depend in significant part on the continued growth of the use of ODBMSs in telecommunications applications and the acceptance of the Company's products within the telecommunications industry. The failure of the Company's products to perform favorably in and become an accepted component of telecommunications applications, a slower than expected increase or a decrease in the volume of sales of the Company's products and services to telecommunications companies, or a general slowdown in the telecommunications industry, could have a material adverse effect on the Company. The Company's future success will also depend on the acceptance of the Company's products for use in new applications, such as the Internet/Intranet market, and other vertical markets such as financial services and health care. The market for applications and commercial products for the Internet/Intranet market is continuing to develop, is rapidly changing, and is characterized by an increasing number of new entrants whose products may compete with those of the Company. As a result, it is difficult to predict the future growth of this market, and there can be no assurance that a viable Internet/Intranet market for object-oriented databases will develop and be sustainable, or that the Company will be successful in attaining a significant share of such market. The Company's future success will depend in significant part upon the continued services of its key technical, sales and senior management personnel, including its president and chief executive officer, David Banks. None of the Company's officers is bound by an employment or non-competition agreement with the Company, and accordingly any such officer can terminate his relationship with the Company at any time. The Company's management systems and resources have been placed under significant strain as a result of the Company's recent growth. This strain is likely to continue as the Company seeks to integrate Versant Europe into its operations and moves its corporate headquarters in 1997. The Company's ability to manage these changes effectively will require it to continue to improve its operational, financial and management systems, and to attract and retain highly qualified personnel. There can be no assurance that the Company will be able to make any such improvements in an effective or timely manner or that such improvements will be adequate. ITEM 7. FINANCIAL STATEMENTS The financial statements and supplementary data required by Item 7 are set forth below on pages F-1 to F-17 of this report. ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 22 25 PART III. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The information concerning the Company's directors required by this Item is incorporated by reference to the Company's definitive Proxy Statement for its 1997 Annual Meeting of Shareholder (the "Proxy Statement") under the heading "Election of Directors." The information concerning the Company's executive officers required by this Item is incorporated by reference to the Proxy Statement under the heading "Executive Officers." The section entitled "Compliance under Section 16(a) of the Securities Exchange Act of 1934" appearing in the Proxy Statement sets forth the information concerning compliance by officers, directors and 10% shareholders of the Company with Section 16 of the Exchange Act and is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Proxy Statement under the heading "Executive Compensation." ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management." ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Proxy Statement under the heading "Certain Relationships and Related Transactions." ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Exhibit Index, page X-1. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of the year for which this report is filed. With the exception of the information incorporated herein by reference to the Proxy Statement in Items 9, 10, 11 and 12 of Part III, the Proxy Statement is not deemed to be filed with this Report. 23 26 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Menlo Park, State of California, on this 28th day of March, 1997. VERSANT OBJECT TECHNOLOGY CORPORATION By: /s/ Richard I. Kadet ------------------------------------------ Richard I. Kadet Vice President-Finance and Administration In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date - ---- ----- ---- PRINCIPAL EXECUTIVE OFFICER: /s/ David Banks President and Chief March 28, 1997 - ---------------------------------- Executive Officer David Banks PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ Richard I. Kadet Vice President-Finance March 28, 1997 - ---------------------------------- and Administration Richard I. Kadet ADDITIONAL DIRECTORS: /s/ Mark Leslie Director March 28, 1997 - ---------------------------------- Mark Leslie /s/ Stephen J. Gaal Director March 28, 1997 - ---------------------------------- Stephen J. Gaal /s/ Lawrence K. Orr Director March 28, 1997 - ---------------------------------- Lawrence K. Orr /s/ James Simpson Director March 28, 1997 - ---------------------------------- James Simpson
24 27 VERSANT OBJECT TECHNOLOGY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE PAGE Report of Independent Public Accountants .............................. F-2 Consolidated Balance Sheets ........................................... F-3 Consolidated Statements of Operations ................................. F-4 Consolidated Statements of Shareholders' Equity (Deficit) ............. F-5 Consolidated Statements of Cash Flows ................................. F-6 Notes to Consolidated Financial Statements ............................ F-7 to F-16 Schedule II - Valuation and Qualifying Accounts and Reserves........... F-17 F-1 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Versant Object Technology Corporation: We have audited the accompanying balance sheets of Versant Object Technology Corporation (a California corporation) as of December 31, 1996 and 1995, and the related statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Versant Object Technology Corporation as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California January 22, 1997 (Except for Note 11, as to which the date is March 19, 1997) F-2 29 VERSANT OBJECT TECHNOLOGY CORPORATION BALANCE SHEETS (In thousands)
December 31, ------------------- 1996 1995 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 5,267 $ 1,281 Short-term investments 14,716 -- Accounts receivable, net of allowance for doubtful accounts of $603 in 1996 and $81 in 1995 4,747 4,025 Other current assets 198 561 -------- -------- Total current assets 24,928 5,867 Property and equipment, net 675 365 Deposits 85 91 -------- -------- $ 25,688 $ 6,323 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of capitalized lease obligations $ 226 $ 27 Accounts payable 475 193 Accrued liabilities 2,374 2,235 Deferred revenue 2,811 1,864 Accrued income taxes 115 -- -------- -------- Total current liabilities 6,001 4,319 -------- -------- Long-term liabilities, net of current portion: Capitalized lease obligations 413 74 Deferred rent -- 39 -------- -------- Total long-term liabilities 413 113 -------- -------- Commitments Mandatorily redeemable convertible preferred stock -- 4,429 Shareholders' equity (deficit): Preferred stock: Authorized - 3,000 shares None issued and outstanding -- -- Common stock: Authorized -- 30,000 shares Issued and outstanding -- 8,719 in 1996 and 3,139 in 1995 40,889 20,488 Accumulated deficit (21,615) (23,026) -------- -------- Total shareholders' equity (deficit) 19,274 (2,538) -------- -------- $ 25,688 $ 6,323 ======== ========
The accompanying notes are an integral part of these statements. F-3 30 VERSANT OBJECT TECHNOLOGY CORPORATION STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended December 31, ------------------------------ 1996 1995 1994 ---- ---- ---- Revenue: License $ 12,202 $ 7,810 $ 5,649 Services 6,191 4,067 2,590 -------- -------- -------- Total revenue 18,393 11,877 8,239 -------- -------- -------- Cost of revenue: License 1,144 1,062 930 Services 2,987 2,258 1,563 -------- -------- -------- Total cost of revenue 4,131 3,320 2,493 -------- -------- -------- Gross profit 14,262 8,557 5,746 Operating expenses: Marketing and sales 8,327 6,319 5,710 Research and development 3,323 2,048 2,063 General and administrative 1,501 1,419 1,093 -------- -------- -------- Total operating expenses 13,151 9,786 8,866 Income (loss) from operations 1,111 (1,229) (3,120) -------- -------- -------- Interest income and other, net 429 70 117 -------- -------- -------- Income (loss) before taxes 1,540 (1,305) (3,115) Provision for income taxes 129 73 56 -------- -------- -------- Net income (loss) $ 1,411 $ (1,232) $ (3,059) ======== ======== ======== Net income per share $ 0.18 ======== Pro forma net loss per share $ (0.21) ======== Weighted average common and common equivalent shares 7,781 5,933 ======== ========
The accompanying notes are an integral part of these statements. F-4 31 VERSANT OBJECT TECHNOLOGY CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (In thousands, except share amounts)
Common Stock Total -------------------- Accumulated Shareholders' Shares Amount Deficit Equity (Deficit) -------------------- ------------ ---------------- Balance at December 31, 1993 369,092 $ 1,484 $ (18,735) $ (17,251) Exercise of stock options 64,896 18 -- 18 Conversion of Series A, B, C and D preferred stock to common stock on a one-for-one-share basis 2,327,273 18,669 -- 18,669 Net loss -- -- (3,059) (3,059) --------- --------- --------- --------- Balance at December 31, 1994 2,761,261 20,171 (21,794) (1,623) Exercise of stock options 77,679 17 -- 17 Issuance of common stock to employees 300,000 300 -- 300 Net loss -- -- (1,232) (1,232) --------- --------- --------- --------- Balance at December 31, 1995 3,138,940 20,488 (23,026) (2,538) Conversion of mandatorily redeemable convertible preferred stock to common stock 2,367,424 -- 4,429 4,429 Issuance of common stock in initial public offering, net of issuance costs of $2,216 2,136,842 14,879 -- 14,879 Exercise of stock options and warrants 976,001 343 -- 343 Issuance of common stock to shareholders of 100,000 750 -- 750 Versant Europe Net income -- -- 1,411 1,411 --------- --------- --------- --------- Balance at December 31, 1996 8,719,207 $ 40,889 $ (21,615) $ 19,274 --------- --------- --------- ---------
The accompanying notes are an integral part of these statements. F-5 32 VERSANT OBJECT TECHNOLOGY CORPORATION STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, ------------------------------- 1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,411 $ (1,232) $ (3,059) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 387 286 405 Deferred rent (21) -- 17 Changes in current assets and liabilities: Accounts receivable (761) (1,461) (1,922) Prepaid expenses and other current assets 437 (437) (24) Accounts payable and accrued liabilities 403 303 1,171 Increase in income tax payable 115 -- -- Increase in deferred revenue 947 369 246 -------- -------- -------- Net cash provided by (used in) operating activities 2,918 (2,172) (3,166) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments (18,716) -- (1,692) Proceeds from maturities of short-term investments 4,000 1,692 -- Purchases of property and equipment (72) (250) (316) Deposits (29) 65 3 -------- -------- -------- Net cash provided by (used in) investing activities (14,817) 1,507 (2,005) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of common stock 15,972 317 18 Payment of equipment notes payable -- -- (185) Principal payments under capital lease obligations (87) (18) (135) Proceeds from issuance of preferred stock -- -- 4,429 -------- -------- -------- Net cash provided by financing activities 15,885 299 4,127 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,986 (366) (1,044) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,281 1,647 2,691 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,267 $ 1,281 $ 1,647 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest $ 52 $ 5 $ 17 Foreign withholding taxes $ 14 $ 73 $ 56 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Capital lease obligations incurred for acquisition of equipment $ 625 $ 104 $ -- Conversion of preferred stock to common stock $ 4,429 $ -- $ 18,669
The accompanying notes are an integral part of these statements. F-6 33 VERSANT OBJECT TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. ORGANIZATION AND OPERATIONS Versant Object Technology Corporation (the "Company") was incorporated in California in August 1988. The Company operates in a single industry segment and is involved in the design, development, marketing and support of high performance object database management software systems. The Company is subject to the risks associated with other companies in a comparable stage of development. These risks include, but are not limited to, fluctuations in operating results, seasonality, a lengthy sales cycle, dependence on the acceptance of object database technology, competition, product concentration and other factors. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents and Short-term Investments For purposes of the statements of cash flows, the Company considers all highly liquid cash investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of United States Government obligations. Investments have been accounted for in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115). The Company classifies its investments as held to maturity investments as defined under the provisions of SFAS 115 and carries such investments at amortized cost on its balance sheet. As of December 31, 1996, the Company's investments consisted of the following (in thousands):
Maturity of Securities ------------------------------------- Amortized Cost Basis Within One Year One to Five Years ---------- --------------- ----------------- United States Treasury Bills $14,716 $14,716 $ --
Revenue Recognition Revenue consists mainly of revenue earned under software license agreements, maintenance agreements and consulting and training activities. Revenue from perpetual software license agreements is recognized as revenue upon shipment of the software if no significant vendor obligations remain, payments are due within the Company's normal payment terms and collection of the resulting receivable is probable. In instances where a significant vendor obligation exists, revenue recognition is delayed until such obligation is satisfied. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The Company has entered into contracts with certain of its customers that require the Company to perform development work in return for nonrecurring engineering fees. Revenue related to such nonrecurring engineering fees is generally recognized on a percentage of completion basis. Maintenance revenue is recognized ratably over the term of the maintenance contract. Consulting and training revenue is recognized when a customer's purchase order is received and the services are performed. Cost of license revenue consists principally of product royalties, royalty obligations, product packaging, freight, users manuals, product media, production labor costs and reserves for estimated bad debts. Cost of services revenue consists principally of personnel costs associated with providing training, consulting, technical support and nonrecurring engineering work paid for by customers. F-7 34 The Company acted as sublicensor under an agreement, that expired on December 31, 1996 and was not renewed, on behalf of a certain developer of software tools products that are used in the development of applications on the Company's object-oriented database product. The Company also subcontracts a portion of its consulting work to this developer. The Company incurred product royalty obligations totaling approximately $33,000, $627,000 and $558,000 under the terms of the sublicense agreement in 1996, 1995 and 1994, respectively. Property and Equipment Property and equipment, at cost, consisted of the following (in thousands):
December 31, ------------------- 1996 1995 ---- ---- Computer equipment $ 2,864 $ 2,339 Furniture and fixtures 451 406 Software 521 403 Other 163 154 ------- ------- 3,999 3,302 Less -- Accumulated depreciation and amortization (3,324) (2,937) ------- ------- $ 675 $ 365 ======= =======
Depreciation and Amortization Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets of two to three years. Leased assets are amortized over the shorter of the estimated useful life or the lease term. Software Development Costs Under the criteria set forth in Statement of Financial Accounting Standards No. 86 (SFAS 86), "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of software development costs begins upon the establishment of technological feasibility. The Company has defined the establishment of technological feasibility as the completion of a working model. Amounts capitalized to date under the provisions of SFAS 86 have not been material. Deferred Revenue Deferred revenue represents amounts received from customers under certain license, maintenance and nonrecurring engineering agreements for which the revenue earnings process has not been completed. Deferred revenue was as follows (in thousands):
December 31, -------------------- 1996 1995 ---- ---- Maintenance $1,878 $1,364 Development work 706 400 Training and consulting 227 100 ------ ------ $2,811 $1,864 ====== ======
F-8 35 Accrued Liabilities Accrued liabilities were as follows (in thousands):
December 31, ------------------ 1996 1995 ---- ---- Payroll and related $1,709 $ 727 Royalties and subcontracting fees 120 990 Other 545 518 ------ ------ $2,374 $2,235 ====== ======
Major Customers The Company had sales to major customers as follows (in thousands):
Year Ended December 31, -------------------------------- 1996 1995 1994 ---- ---- ---- Customer A $5,117 $1,248 * Customer B $2,067 $1,575 * Customer C $1,868 * * Customer D * $2,321 $1,208
- ------------------------- * less than 10% Export Sales Export sales, consisting of sales to customers in foreign countries, were $4.2 million, $3.5 million and $3.7 million of total revenue in 1996, 1995 and 1994, respectively. Export sales by country or region were as follows (in thousands):
Year Ended December 31, -------------------------------- 1996 1995 1994 ---- ---- ---- Europe $1,871 * * Canada 702 2,583 1,569 Australia 1,237 232 527 Japan 101 166 331 Other 303 544 1,282 ------ ------ ------ $4,214 $3,525 $3,709 ====== ====== ======
- ------------------------- * not material Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of accounts receivable and short-term investments. Credit is extended based on an evaluation of the customer's financial condition, and generally, collateral is not required. As of December 31, 1996, approximately 39% of accounts receivable were concentrated with four customers. The Company generally does not require collateral on accounts receivable as the majority of the Company's customers are large, well established companies. The Company provides reserves for credit losses and such losses have been insignificant to date. F-9 36 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Net Income Per Share and Pro Forma Net Loss Per Share For periods after the Company's initial public offering in July 1996, net income per share has been computed using the weighted average number of common and common equivalent shares (using the treasury stock method for outstanding options). For the year ended December 31, 1995 and for the portion of 1996 preceding the initial public offering, net income (loss) per share was computed on a pro forma basis. Pro forma net loss per share is computed using the pro forma weighted average number of common equivalent shares outstanding during the period. Common equivalent shares consist of mandatorily redeemable convertible preferred stock (using the if converted method) and stock options and warrants (using the treasury stock method). Common stock options and warrants are excluded from the computation if their effect is antidilutive except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletins and staff policy, such computations include all common and common equivalent shares issued within the 12 months preceding the filing date of the registration statement for the initial public offering as if they were outstanding for all periods presented (using the treasury stock method and the initial public offering price of $8.00 per share). Mandatorily redeemable convertible preferred stock outstanding during the period is included (using the if converted method) in the computation as common equivalent shares even though the effect is antidilutive. A historical net loss per share amount has not been presented for 1994 since such amount is not deemed meaningful due to the significant change in the Company's capital structure that occurred in connection with the initial public offering. Reclassifications Certain reclassifications have been made to amounts in prior years to conform to the 1996 presentation. 3. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS The Company leases its corporate headquarters facility under a four-year operating lease agreement which expires in August 1997. The terms of the lease provide for certain increases in rental payments during the lease term. Rental expense under this agreement is recognized on a straight-line basis. The Company also leases field office space generally under one-year operating lease agreements. Rent expense for 1996, 1995 and 1994 was approximately $427,000, $357,000 and $311,000, respectively. The future annual minimum lease payments at December 31, 1996 under noncancellable operating leases were as follows (in thousands): 1997 $216 1998 64 ---- $280 ====
The Company has entered into capital lease agreements for equipment with an original cost of $625,000 at December 31, 1996. The future minimum lease payments required under these capital leases at December 31, 1996 were as follows (in thousands): 1997 $ 281 1998 274 1999 168 2000 6 ----- Minimum lease payments 729 Less amount representing interest 90 ----- Present value of net minimum lease payments 639 Current maturities (226) ----- Long term maturities $ 413 =====
F-10 37 4. LINE OF CREDIT In June 1996, the Company entered into a $2,500,000 credit agreement (limited to 80% of eligible accounts receivable). Borrowings under the line bear interest at the bank's prime rate plus 1/2%. This line is available to issue stand-by or commercial letters of credit, and to enter into foreign exchange contracts and settlements. The agreement contains certain financial covenants that, among others things, require the Company to maintain (a) a minimum quick ratio on a quarterly basis of 1.75 to 1.0, (b) a minimum tangible net worth of $6.05 million, (c) a maximum debt to tangible net worth ratio of 1.0 over the term of the agreement and (d) certain monthly and quarterly profitability thresholds as defined in the agreement. There were no borrowings under this agreement as of December 31, 1996. The agreement expires in May 1997. The Company was in compliance with the above covenants at December 31, 1996. 5. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK Prior to 1994, the Company had issued preferred stock to private investors in a series of transactions resulting in shares of Series A, B, C and D preferred stock being outstanding at the end of 1993. During 1994, in connection with a new round of financing, all then outstanding preferred shares were converted to Common Stock, a 1-for-9 reverse stock split was effected and a new class of Series A and B redeemable preferred stock was issued at $1.9008 per share ("New Series A" and "New Series B", respectively). In addition, shares of Series A-1 and B-1 preferred stock were authorized for future issuance to investors. In conjunction with the Company's initial public offering of Common Stock, all outstanding shares of Mandatorily Redeemable Convertible Preferred Stock were converted into Common Stock. The effects of this conversion have been reflected in the accompanying balance sheet at December 31, 1996. A summary of outstanding Mandatorily Redeemable Convertible Preferred Stock, net of issuance costs, is as follows (in thousands, except share data):
December 31, 1995 ----------------------- Shares Amount ------ ------ New Series A 1,707,682 $ 3,195 New Series B 659,742 1,234 --------- ------- 2,367,424 $ 4,429 ========= =======
6. COMMON STOCK In July and August of 1996, the Company completed its initial public offering of 2,380,500 shares of Common Stock (including an over-allotment option of 310,500 shares) at $8.00 per share, resulting in net proceeds to the Company of $14.9 million after offering costs. In May 1996, the Company sold 100,000 shares of Common Stock to the owners of Versant Europe at a price of $7.50 per share for total proceeds to the Company of $750,000. The Company filed Amended and Restated Articles of Incorporation dated April 27, 1994, which among other items, effected a 1-for-9 reverse stock split for all shares outstanding. All share and per share amounts in these financial statements reflect the post-split values. Also in April 1994, the Company effected a one-for-one conversion of Series A, B, C and D preferred stock into Common Stock and sold shares in a new class of Series A and B Preferred Stock. The Company has, in connection with the initial public offering of the Company's Common Stock, converted all the outstanding shares of Mandatorily Redeemable Convertible Preferred Stock into Common Stock. During 1995, the Company sold shares of Common Stock to employees at $1.00 per share, which represented fair market value on April 22, 1995. These share issuances were made as pursuant to the 1989 Stock Option Plan and such amounts are included in the option grant and option exercise table below. F-11 38 7. STOCK OPTIONS AND PURCHASE PLANS 1996 Equity Incentive Plan In May 1996, the Board adopted the 1996 Equity Incentive Plan (the "1996 Equity Plan") and the Company's shareholders approved the 1996 Equity Plan in June 1996. The 1996 Equity Plan will serve as the successor equity incentive program to the Company's 1989 Option Plan. The 1996 Equity Plan provides for the grant of stock options and stock bonuses and the issuance of restricted stock by the Company to its employees, officers, directors, consultants, independent contractors and advisors. Options granted under the 1989 Option Plan before its termination remain outstanding in accordance with their terms, but no further options have been granted under the 1989 Option Plan since the initial public offering. Any authorized shares that are not issued or subject to outstanding grants under the 1989 Option Plan will be available for grant and issuance in connection with future awards under the 1996 Equity Plan. As of December 31, 1996, the Company has authorized 850,000 shares of Common Stock for issuance under the 1996 Equity Plan. At December 31, 1996, no options were exercisable. 1996 Directors Stock Option Plan In May 1996, the Board adopted the 1996 Directors Stock Option Plan (the "Directors Plan") and the Company's shareholders approved the Directors Plan in June 1996. The Directors Plan provides for the grant of nonqualified stock options to nonemployee directors of the Company, including automatic grants of options to purchase 10,000 shares of Common Stock to nonemployee directors that were granted concurrently with the initial public offering, an option to new nonemployee directors to purchase 10,000 shares of Common Stock on the date on which the new director joins the Board and an additional option to purchase 5,000 shares of Common Stock to each eligible director on each anniversary date of such director's initial option grant under the Directors Plan if such director has served continuously as a member of the Board since the date such director was first granted an option under the Directors Plan. The exercise price of all options granted under the Directors Plan will be the fair market value of the Common Stock on the date of grant. All options issued under the Directors Plan will vest as to 50% of the shares on each of the first two anniversaries following the date of grant, provided the optionee continues as a member of the Board or as a consultant to the Company. As of December 31, 1996, the Company has authorized 75,000 shares of Common Stock for issuance under the Directors Plan. At December 31, 1996, options for an aggregate of 50,000 shares were granted and no options were exercisable. 1989 Stock Option Plan As of December 31, 1996, the Company has authorized 2,013,826 shares of Common Stock for issuance under the 1989 Stock Option Plan (the "Plan"). This plan was succeeded by the 1996 Equity Plan during 1996. Under the provisions of the Plan, the Board of Directors granted either incentive or non-statutory stock options to employees, consultants, directors and officers to purchase Common Stock at an exercise price of not less than 100% of the fair value (as determined by the Board of Directors) of the shares on the date of grant, except that non-statutory options were granted at 85% of such fair value. Options expire no later than ten years from the date of grant and generally vest over a period of 5 years. During 1991, the Company granted a non-statutory stock option to a shareholder to purchase up to 11,111 shares of the Company's Common Stock at a price of $0.25 per share. The option was granted outside the Plan as consideration for consulting services to be provided by the shareholder to the Company and for the shareholder to serve on the Company's Advisory Board. This option vests 20% per year over five years, as long as the shareholder is providing consulting services to the Company. During 1994, the Company canceled 534,065 options with exercise prices ranging from $0.36 to $2.25 per share that had been granted in prior years and replaced them with 534,065 options at $0.25 per share, the fair value of the stock on April 27, 1994. This transaction was treated as a cancellation of the old options and the grant of new options in accordance with the provisions of the 1989 Option Plan. F-12 39 Reserved for Future Issuance As of December 31, 1996, the Company had reserved shares of Common Stock for the following purposes: Exercise of common stock warrants 21,053 Employee stock purchase plan 125,000 Exercise of stock options 1,395,677 --------- 1,541,730 ---------
The Company applies APB Opinion No. 25 and related interpretations in accounting for its Option Plan. Accordingly, no compensation cost has been recognized for its Option Plan. Had compensation cost for the Company's Option Plan been determined based on the fair value at the grant dates for the awards calculated in accordance with the method prescribed by FASB Statement No. 123, the Company's net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
1996 1995 ------- ------- Net income (loss) As Reported $ 1,411 $(1,232) Pro forma $ 989 $(1,270) Net income (loss) per share As Reported $ 0.18 $ (0.21) Pro forma $ 0.13 $ (0.21)
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions: Expected dividend yield 0% Expected stock price volatility 90% Risk-free interest rate 7.0% Expected life of options 5.75 years Forfeiture rate N/A
F-13 40 The weighted average fair value of options granted during 1996 and 1995 was $7.31 and $0.95 per share, respectively. Option activity under all Option Plans is as follows:
Options Outstanding ---------------------------- Weighted Options Number of Average Available Shares Exercise Price --------- ------ -------------- Balance at December 31, 1993 118,616 452,480 $0.29 Authorized 435,589 -- -- Granted (1,110,125) 1,110,125 0.25 Exercised -- (64,933) 0.26 Canceled 633,233 (633,233) 0.50 ---------- ---------- ----- Balance at December 31, 1994 77,313 864,439 0.25 Authorized 800,000 -- -- Granted (873,361) 873,361 0.95 Exercised -- (377,679) 0.35 Canceled 198,977 (198,977) 0.25 ---------- ---------- ----- Balance at December 31, 1995 202,929 1,161,144 0.59 Authorized 1,075,000 -- -- Granted (608,365) 605,365 7.31 Exercised -- (929,506) 0.59 Canceled 74,476 (74,476) 4.92 ---------- ---------- ----- Balance at December 31, 1996 744,040 762,527 $5.48 ========== ========== =====
As of December 31, 1996, 55,362 of the outstanding options were exercisable.
Options Outstanding Options Exercisable ---------------------------------- --------------------------------- Number Weighted Weighted Number Outstanding Average Average Exercisable at Weighted at December 31, Remaining Exercise December 31, Average Exercise Prices 1996 Contractual Life Price 1996 Exercise Price --------------- --------------- ---------------- -------- -------------- -------------- $0.250 85,792 7.48 $ 0.250 22,316 $0.250 1.000 150,621 8.52 1.000 27,462 1.000 1.500 115,300 9.05 1.500 5,583 1.500 7.500 69,650 9.32 7.500 -- 8.000 225,000 9.55 8.000 -- 8.125 66,800 9.56 8.125 -- 18.750 52,365 9.81 18.750 -- ------- ------ 765,528 55,362 ======= ======
1996 Employee Stock Purchase Plan In May 1996, the Board adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan") and the Company's shareholders approved the Purchase Plan in June 1996. The Company has reserved 125,000 shares of Common Stock for issuance under the Purchase Plan. The Purchase Plan will enable eligible employees to purchase common stock at 85% of the lower of the fair market value of the Company's Common Stock on the first or the last day of each offering period. As of December 31, 1996, no shares had been issued. F-14 41 8. INCOME TAXES The Company accounts for income taxes pursuant to the provisions of SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to accounting for income taxes. The Company incurred net operating losses in 1995 and 1994 and consequently paid no federal or state taxes based on income. The Company did pay foreign withholding taxes during that period. The provision for income taxes consisted of the following components (in thousands):
December 31, ------------------------ 1996 1995 1994 ---- ---- ---- Current: Federal $ 75 $-- $-- State 40 -- -- Foreign withholding 14 73 56 ---- ---- ---- Total current 129 73 56 Deferred: Federal -- -- -- State -- -- -- ---- ---- ---- Total deferred -- -- -- Total provision for income taxes $129 $ 73 $ 56 ==== ==== ====
The provision for income taxes differs from the amount estimated by applying the statutory federal income tax rate to income (loss) before income taxes as follows (in thousands):
December 31, -------------------------- 1996 1995 1994 ----- ----- ----- Provision (benefit) computed at federal statutory rate $ 534 $(431) $ -- State income taxes, net of federal benefit 92 -- -- Change in valuation allowance (750) 376 -- Other 243 128 56 ----- ----- ----- Provisions for income taxes $ 129 $ 73 $ 56 ----- ----- ----- Effective tax rate 7.5% -- --
The components of the net deferred tax asset were as follows (in thousands):
December 31, ------------------- 1996 1995 ---- ---- Deferred tax asset: Net operating loss carryforwards $ 6,438 $ 7,573 Tax credit carryforwards 1,064 840 Other 700 539 ------- ------- 8,202 8,952 Valuation allowance (8,202) (8,952) ------- ------- Net deferred tax asset $ -- $ -- ======= =======
At December 31, 1996, the Company had federal and state net operating loss carryforwards of $17.0 million and $5.4 million, respectively, and tax credit carryforwards of $1.1 million, which all expire through 2010. Due to its history of operating losses through 1995 and other factors, the Company believes that there is sufficient uncertainty regarding the realizability of net operating loss and tax credit carryforwards, and therefore a valuation allowance of approximately $8.2 million has been recorded against the Company's net deferred tax assets of approximately $8.2 million. F-15 42 Due to the "change in ownership" provisions of the Internal Revenue Code of 1986, the availability of net operating loss and tax credit carryforwards to offset federal taxable income in future periods is subject to an annual limitation due to changes in ownership for income tax purposes. Usage of net operating loss carryforwards is limited to approximately $4.0 million per year because of past ownership changes. 9. RELATED PARTIES The Company has an agreement with a shareholder, under which a) the Company licenses for resale certain of the shareholder's products and remits a royalty to the shareholder and b) the shareholder performed certain porting of the Company's products in exchange for a royalty payment related to ongoing sales of these products. Royalties due under these agreements were $41,000 and $50,000 at December 31, 1996 and 1995, respectively. In 1992, the Company also entered into a distribution agreement with this shareholder, under which revenue to date has not been material. 10. DISTRIBUTOR ARRANGEMENT During 1995, the Company entered into an arrangement with a group of European investors pursuant to which the investors organized and funded an independent German company ("Versant Europe"), which became the exclusive distributor of the Company's product in Europe, including direct distribution in Germany and responsibility for managing certain existing distributors of the Company's product in other parts of Europe. There is no fixed term to the distributor agreement; however, either party can cancel the arrangement under certain circumstances. In the event that the Company is sold, shareholders of the distributor have the right to require the Company to purchase their interest in the distributor at a price determined using a formula that the parties have agreed upon as the means to calculate the fair market value of the distributor. Also, the Company has the right to acquire the distributor any time after March 1996 using the same formula as above and has a right of first refusal on the sale of the distributorship to another party at a price equal to the offer made by the other party. (See Note 11). Revenue from sales to this distributor during the year ended December 31, 1996 was $1,868,000. Sales to this distributor in 1995 were immaterial. 11. SUBSEQUENT EVENTS On March 19, 1997, the Company exercised its right to acquire Versant Europe using the agreed upon price formula, as adjusted. Upon closing, the Company expects to pay approximately $2.0 million in cash and $1.6 million in Common Stock for 100% of the outstanding equity of Versant Europe. The Company expects the transaction to close on or before March 31, 1997. The Company will record this transaction under the purchase method of accounting. On February 2, 1997, the Company entered into a ten-year corporate facility lease agreement. The lease begins on June 1, 1997 and expires on May 31, 2007. The total annual minimum lease payments under this agreement will be as follows (in thousands): 1997 $ 658 1998 1,128 1999 1,128 2000 1,128 2001 1,128 Beyond 2001 6,110 -------- $ 11,280 ========
F-16 43 VERSANT OBJECT TECHNOLOGY CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance at Additions Beginning Charged to Balance at of Year Income Deductions End of Year ---------- ---------- ---------- ----------- (in thousands) Allowance for doubtful accounts and customer returns: Year ended December 31, 1994 $ 44 32 3 $ 73 Year ended December 31, 1995 $ 73 63 55 $ 81 Year ended December 31, 1996 $ 81 621 99 $ 603
F-17 44 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT TITLE 3.01 -- Registrant's Amended and Restated Articles of Incorporation, as amended(1) 3.02 -- Registrant's Certificate of Amendment of Articles of Incorporation filed prior to the closing of registrant's initial public offering(1) 3.03 -- Registrant's Amended and Restated Articles of Incorporation filed following the closing of registrant's initial public offering(1) 3.04 -- Registrant's Bylaws(1) 3.05 -- Registrant's Amended and Restated Bylaws adopted prior to the closing of registrant's initial public offering(1) 4.01 -- [intentionally omitted] 4.02 -- Preferred Stock Purchase Agreement, dated as of April 27, 1994, as amended(1) 10.01 -- Registrant's 1989 Stock Option Plan, as amended, and related documents(1)** 10.02 -- Registrant's 1996 Equity Incentive Plan and related documents(1)** 10.03 -- Registrant's 1996 Directors Stock Option Plan and related documents(1)** 10.04 -- Registrant's 1996 Employee Stock Purchase Plan and related documents(1)** 10.05 -- Registrant's 401(k) Plan and addendum thereto(1) 10.06 -- Lease Agreement dated March 22, 1993 between Lincoln Property Company N.C., Inc. and Registrant, as amended(1) 10.07 -- Master Lease Agreement dated January 26, 1996 between LINC Capital Management, a division of Scientific Leasing Inc., and Registrant(1) 10.08 -- Amended and Restated Loan and Security Agreement dated as of June 14, 1996 between Registrant and Silicon Valley Bank(1) 10.09 -- Joint Venture Agreement dated as of July 26, 1995 between Registrant and ISAR-Vermogensverwaltung Gbr mbH(1)* 10.10 -- Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers(1) 10.11 -- Versant 1996 Executive Compensation Plan -- Rich Kadet(1)*/** 10.12 -- Versant 1996 Executive Compensation Plan -- George Franzen(1)*/** 10.13 -- Versant 1996 Executive Compensation Plan -- Jim Lochry(1)*/** 10.14 -- Form of Amendment to Versant Object Technology Corporation Stock Option Agreement(1)** 10.15 -- Lease Agreement dated November 25, 1996 between John Arrillaga, Trustee et. al. and Versant Object Technology Corporation(2) 11.01 -- Statement regarding computation of per share earnings(2) 23.01 -- Consent of Arthur Andersen LLP, Independent Public Accountants(2) 27.01 -- Financial Data Schedule(2) (1) Incorporated by reference to the registrant's Registration Statement on Form SB-2 (file number 333-4910-LA) filed with and declared effective by the Securities and Exchange Commission on July 17, 1996. (2) Filed herewith. * Confidential treatment has been requested with respect to certain portions of this agreement. Such portions have been omitted from the filing and have been filed separately with the Securities and Exchange Commission. ** Management contract or compensatory plan. X-1 EX-10.15 2 LEASE AGEEMENT DATED NOVEMBER 25, 1996 1 Exhibit 10.15 LEASE AGREEMENT THIS LEASE, made this 25th day of November, 1996 between JOHN ARRILLAGA, Trustee, or his Successor Trustee, UTA dated 7/20/77 (ARRILLAGA FAMILY TRUST) as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter called Landlord, and VERSANT OBJECT TECHNOLOGY CORPORATION, a California corporation, hereinafter called Tenant. WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the "Premises") outlined in red on Exhibit "A", attached hereto and incorporated herein by this reference thereto more particularly described as follows: All of that certain 54,492+ square foot, one-story building to be constructed by Landlord and to be located at 6539 Dumbarton Circle, Fremont, California 94555 ("Building"). Said Premises and exclusive parking appurtenant thereto are more particularly shown within the area outlined in Red on Exhibit A attached hereto. The entire parcel, of which the Premises is a part, is shown within the area outlined in Green on Exhibit A attached hereto. The interior of the Building leased hereunder shall be constructed by Landlord as set forth in the related Construction Agreement of even date herewith. The improved interior configuration is shown in Red on Exhibit B to be attached hereto. The word "Premises" as used throughout this lease is hereby defined to include the nonexclusive use of landscaped areas, sidewalks and driveways in front of or adjacent the Premises, and the nonexclusive use of the area directly underneath or over such sidewalks and driveways. The gross leasable area of the Building shall be measured from outside of exterior walls to outside of exterior walls, and shall include any atriums, covered entrances or egresses and covered loading areas. Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. USE Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of general office, light manufacturing, research and development, and storage and other uses necessary for Tenant to conduct Tenant's business, provided that such uses shall be in accordance with all applicable governmental laws and ordinances, and for no other purpose. Tenant shall not do or permit to be done in or about the Premises nor bring or keep or permit to be brought or kept in or 1 Initials:_______ Initials:_______ 2 about the Premises anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Premises or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Premises or any part thereof, or any of its contents. Tenant shall not do or permit to be done anything in, on or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Premises or neighboring premises or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. No sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated by Landlord. No materials, supplies, equipment, finished products or semifinished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall, which may appear unsightly from outside the Premises. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, reasonable attorneys' fees, or liability arising out of failure of Tenant to comply with any applicable law, governing Tenant's use of the Premises. Tenant shall comply with any covenant, condition, or restriction ("CC&R's") affecting the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Premises. 2. TERM(1) A. The term of this Lease shall be for a period of TEN (10) years (unless sooner terminated as hereinafter provided) and, subject to Paragraphs 2B and 3, shall commence on the 1st day of June 1997 and end on the 31st day of May 2007. B. Possession of the Premises shall be deemed tendered and the term of the Lease shall commence when the first of the following occurs: (a) One day after Certificate of Occupancy is granted by the proper governmental agency, or, if the governmental agency having jurisdiction over the area in which - -------- (1)It is agreed in the event said Lease commences on a date other than the first day of the month the term of the Lease will be extended to account for the number of days in the partial month. The Basic Rent during the resulting partial month will be pro-rated (for the number of days in the partial month) at the Basic Rent rate scheduled for the projected commencement date as shown in Paragraph 39. 2 Initials:_______ Initials:_______ 3 the Premises are situated does not issue certificates of occupancy, then the same number of days after certification by Landlord's architect or contractor that Landlord's construction work has been completed; or (b) Upon the occupancy of the Premises by any of Tenant's or operating personnel; or (c) When the Tenant Improvements have been substantially completed for Tenant's use and occupancy, in accordance and compliance with Exhibit B of this Lease Agreement and the related Construction Agreement; or (d) As otherwise agreed in writing. 3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver possession of said premises to Tenant at the commencement of the said term, as hereinbefore specified, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession, as specified in Paragraph 2B, above. The above is, however, subject to the provision that the period of delay of delivery of the Premises shall not exceed 140 days from the commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord's control shall be excluded in calculating such period) in which instance Tenant, at its option, may by written notice to Landlord, terminate this Lease. 4. RENT A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of ELEVEN MILLION TWO HUNDRED SEVENTY NINE THOUSAND EIGHT HUNDRED FORTY FOUR AND NO/100 Dollars ($11,279.844.00) in lawful money of the United States of America, payable as follows: See Paragraph 39 for Basic Rent Schedule B. Time for Payment. Full monthly rent is due in advance on the first day of each calendar month. In the event that the term of this Lease commences on a date other than the first day of the calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). 3 Initials:_______ Initials:_______ 4 C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant is in default in the payment of rental as set forth in this Paragraph 4 when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) days. Said late charge shall equal ten percent (10%) of each rental payment so in default. D. Additional Rent. Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord or to Landlord's designated agent in addition to the Basic Rent and as Additional Rent the following: (a) All Taxes relating to the Premises as set forth in Paragraph 9, and (b) All insurance premiums relating to the Premises, as set forth in Paragraph 12, and (c) All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including reasonable attorneys' fees and legal expenses, that may accrue thereto in the event of Tenant's failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant's part to comply with the terms of this Lease. In the event of nonpayment by Tenant of Additional Rent, Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of rent, and (d) all prorated costs and expenses related to the Ardenwood Property Owners' Associations as set forth in Paragraph 49. The additional Rent due hereunder shall be paid to Landlord or Landlord's agent (i) within five days for taxes and insurance and within thirty days for all other Additional Rent items after presentation of invoice from Landlord or Landlord's agent setting forth such Additional Rent and/or (ii) at the option of Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorated share of an amount estimated by Landlord to be Landlord's approximate average monthly expenditure for such Additional Rent items, which estimated amount shall be reconciled within 120 days of the end of each calendar year or more frequently if Landlord elects to do so at Landlord's sole and absolute discretion, as compared to Landlord's actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand, any amount of actual expenses expended by Landlord in excess of said estimated amount, or Landlord refunding to Tenant (providing Tenant is not in default in the performance of any of the terms, covenants and conditions of this Lease) any amount of estimated payments made by Tenant in excess of Landlord's actual expenditures for said Additional Rent items. Upon request, by Tenant, Landlord shall provide reasonable detail supporting such invoices. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the term 4 Initials:_______ Initials:_______ 5 hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. E. Fixed Management Fee. Beginning with the Commencement Date of the Term of this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and Additional Rent, a fixed monthly management fee ("Management Fee") equal to 2% of the Basic Rent due for each month during the Lease Term. F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of Landlord at Peery/Arrillaga, File 1504, box 60000, San Francisco, CA 94160, or to such other person or to such other place as Landlord may from time of time designate in writing. * G. Security Deposit. Currently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of TWO HUNDRED TWELVE THOUSAND FIVE HUNDRED EIGHTEEN AND 80/100 Dollars ($212,518.80). Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent and any of the monetary sums due herewith, after passage of the applicable notice an cure period, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said Deposit to Landlord's successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. 5. ACCEPTANCE AND SURRENDER OF PREMISES BY entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without - ---------- *$106,259.40 Cash due upon Lease execution. $106,259.40 Promissory Note due June 1, 1998. 5 Initials:_______ Initials:_______ 6 representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Acts of God, fire, normal wear and tear excepted), with all interior walls painted, or cleaned so that they appear freshly painted, and repaired and replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; all broken, marred or nonconforming acoustical ceiling tiles replaced; all windows washed; the air-conditioning and heating systems serviced by a reputable and licensed service firm and in good operating condition and repair; the plumbing and electrical systems and lighting in good order and repair, including replacement of any burned out or broken light bulbs or ballasts; together with all alterations, additions, and improvements which may have been made in, to, or on the Premises (except moveable trade fixtures installed at the expense of Tenant) except that, subject to Paragraph 6 below, Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant's sole cost and expense, (which written consent will specify whether Landlord shall require removal of said alterations and/or additions), Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such removal at Tenant's sole cost. If the Premises be not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant or a mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies. 6. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord first had and obtained by Tenant, (which written consent will specify whether Landlord shall require removal of said alterations and/or additions), (such consent not to be unreasonably withheld), but at the cost of Tenant, and any addition to, or alteration of, the Premises, except moveable furniture and trade fixtures, shall at once become a part of the Premises and belong to Landlord. Landlord reserves the right to approve all contractors and mechanics proposed by Tenant to make such alterations and additions. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, lighting, electrical, air-conditioning, floor to ceiling partitioning, drapery, carpeting, and floor installations made by Tenant, together with 6 Initials:_______ Initials:_______ 7 all property that has become an integral part of the Premises, shall not be deemed trade fixtures. Tenant agrees that it will not proceed to make such alteration or additions, without having obtained consent from Landlord to do so, and until five (5) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for such work. Tenant further covenants and agrees that any mechanic's lien filed against the Premises for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10) days after the filing thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant. 7. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and maintain the Premises (including appurtenances) and every part thereof in a high standard of maintenance and repair, or replacement, and in good and sanitary condition. Tenant's maintenance and repair responsibilities herein referred to include, but are not limited to, janitorization, all windows (interior and exterior), window frames, plate glass and glazing (destroyed by accident or act of third parties), truck doors, plumbing systems (such as water and drain lines, sinks, toilets, faucets, drains, showers and water bulbs, tubes and fountains), electrical systems (such as panels, conduits, outlets, lighting fixtures, lamps, bulbs and ballasts), heating and air-conditioning systems (such as compressors fans air handlers, ducts, mixing boxes, thermostats, time clocks, boilers, heaters, supply and return grills), structural elements and exterior surfaces of the building, store fronts, roofs, downspouts, all interior improvements within the premises including but not limited to wall coverings, window coverings, carpet, floor coverings, partitioning, ceilings, doors (both interior and exterior), including closing mechanisms, latches, locks, skylights (if any), automatic fire extinguishing systems, and elevators and all other interior improvements of any nature whatsoever. Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant's sole expense upon Lease termination. Tenant hereby waives all rights under, and benefits of, Subsection 1 of Section 1932 and 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. In the event any of the above maintenance responsibilities apply to any other tenant(s) of Landlord where there is common usage with other tenant(s), such maintenance responsibilities and charges shall be allocated to the leased Premises by square footage or other equitable basis as calculated and determined by Landlord. 8. UTILITIES Tenant shall pay promptly, as the same become due, all charges for water, gas, electricity, telephone, telex and other electronic communication service, sewer service, waste pick-up and any other utilities, materials or services furnished directly to or used by Tenant on or about the Premises during the term of this Lease, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. In the event the above charges apply to any other tenant(s) or Landlord where there is common usage with 7 Initials:_______ Initials:_______ 8 other tenant(s), such charges shall be allocated to the leased Premises by square footage or other equitable basis as calculated and determined by Landlord. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, or other labor disturbances or labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. 9. TAXES A. As Additional rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord, or if Landlord so directs, directly to the Tax Collector, all Real Property taxes relating to the Premises. In the event the Premises leased hereunder consist of only a portion of the entire tax parcel, Tenant shall pay to Landlord Tenant's proportionate share of such real estate taxes allocated to the leased Premises by square footage or other reasonable basis as calculated and determined by Landlord. If the tax billing pertains 100% to the leased Premises, and Landlord chooses to have Tenant pay said real estate taxes directly to the Tax Collector, then in such event it shall be the responsibility of Tenant to obtain the tax and assessment bills and pay, prior to delinquency, the applicable real property taxes and assessments pertaining to the leased Premises, and failure to receive a bill for taxes and/or assessments shall not provide a basis for cancellation of or nonresponsibility for payment of penalties for nonpayment or late payment by Tenant. The term "Real Property Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership of the Premises) now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Premises (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein; any improvements located within the Premises (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Premises; or parking areas, public utilities, or energy within the Premises; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Premises; and (iii) all costs and fees (including reasonable attorney's fees) incurred by Landlord in reasonably contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the term of this Lease the taxation or assessment of the Premises prevailing as of the commencement date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Premises or Landlord's interest herein or (ii) on or measured by the gross receipts, income or rentals from the Premises, on Landlord's business of leasing the Premises, or computed in any manner with respect to the operation of the Premises, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents 8 Initials:_______ Initials:_______ 9 unrelated to the Premises, then only that part of such Real Property Tax that is fairly allocable to the Premises shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. See Paragraph 49 B. Taxes on Tenant's Property Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant. Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of such taxes so paid under protest, and any amount so recovered shall belong to Tenant. 10. LIABILITY INSURANCE Tenant, at Tenant's expense, agrees to keep in force during the term of this Lease a policy of commercial general insurance with combined single limit coverage of not less than Two Million Dollars ($2,000,000) for bodily injury and property damage occurring in, on or about the Premises, including parking and landscaped areas. Such insurance shall be primary and noncontributory as respects any insurance carried by Landlord. The policy or policies effecting such insurance shall name Landlord as additional insureds, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including any failure of Tenant to observe or perform any of its obligations hereunder; shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) day's prior written notice to Landlord. A certificate of insurance of said policy should be delivered to Landlord. If, during the term of this Lease, in the considered reasonable opinion of Landlord's Lender, insurance advisor, or counsel, the amount of insurance described in Paragraph 10 is not adequate, Tenant agrees to increase said coverage to such reasonable amount as Landlord's Lender, insurance advisor, or counsel shall deem adequate. 11. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE Tenant shall maintain a policy or policies of fire and property damage insurance in "all risk" form with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures, and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be used for the repair or replacement of such items so insured. 9 Initials:_______ Initials:_______ 10 Tenant shall also maintain a policy or policies of workman's compensation insurance an and any other employee benefit insurance sufficient to comply with all laws. 12. PROPERTY INSURANCE Landlord shall purchase an keep in force, and as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's proportionate share (allocated to the leased Premises by square footage or other equitable basis as calculated and determined by Landlord) of the deductibles on insurance claim and the cost of, policy or policies of insurance covering loss or damage to the Premises (excluding routine maintenance and repairs and incidental damage or destruction caused by accidents or vandalism for which Tenant is responsible under Paragraph 7) in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risks" insurance and flood and/or earthquake insurance, if available, plus a liability policy and a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as Additional Rent. If such insurance cost is increased due to Tenant's use of the Premises, Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Premises. Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in the releasing party's insurance coverage policies, irrespective of the cause of such fire or casualty; provided, however, that if the insurance policy of either releasing party prohibits such waiver, then this waiver shall not take effect until consent to such waiver is obtained. If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof. 13. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises but excluding, however, the willful misconduct or negligence of Landlord, its agents, servants, employees, invitees, or contractors of which negligence Landlord has knowledge and reasonable time to correct. Except as to injury to persons or damage to property to the extent arising from the willful misconduct or the negligence of Landlord, its agents, servants, employees, invitees, or contractors. Tenant shall hold Landlord against any and all expenses, including reasonable attorneys' fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, from any cause whatsoever. 14. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in effect, pertaining to said Premises, with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such failure shall be deemed a breach of the provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgment of any court of competent jurisdiction or the 10 Initials:_______ Initials:_______ 11 admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Premises. 15. LIENS TENANT shall keep the Premises free from any liens arising out of any work performed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. 16. ASSIGNMENT AND SUBLETTING Tenants shall not assign, transfer, or hypothecate the leasehold estate under this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld. As a condition for granting this consent to any assignment transfer, or subletting, Landlord may require that Tenant agrees to pay Landlord, as additional rent, fifty percent (50%) of all rents or additional consideration ("Excess Rent") received by Tenant from its assignees, transferees, or subtenants in excess of the rent payable by Tenant to Landlord hereunder, provided, however, that before sharing such Excess Rent, Tenant shall first be entitled to recover from such Excess Rent the amount of any reasonable leasing commissions paid by Tenant to third parties not affiliated with Tenant. Tenant shall, by thirty (30) days written notice, advise Landlord of its intent to assign or transfer Tenant's interest in the Lease or sublet the Premises or any portion thereof for any part of the term hereof. Within thirty (30) days after receipt of said written notice, Landlord may, in its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant's notice on the date specified in Tenant's notice by giving written notice of such election to terminate. Notwithstanding the above, Landlord shall not have a right to terminate said Lease in the event of a sublease, unless Tenant subleases more than forty percent (40%) of said Leased Premises. If no such notice to terminate is given to Tenant within said thirty (30) days period, Tenant may proceed to locate an acceptable sublessee, assignee, or other transferee for presentment to Landlord for Landlord's approval, all in accordance with the terms, covenants, and conditions of this paragraph 16. If Tenant intends to sublet the entire Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant's notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all the Premises, the rent, as defined and reserved hereinabove shall be adjusted on a pro rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue in full force and effect. In the event Tenant is allowed to assign, transfer or sublet the 11 Initials:_______ Initials:_______ 12 whole or any part of the Premises, with prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of Landlord. As of the date of this Lease, Landlord represents that there are no direct loans outstanding on the Premises leased hereunder. A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease. The leasehold estate under this Lease shall not, nor shall any interest herein, be assignable for any purpose by operation of law without the written consent of Landlord. As a condition to its consent, Landlord may require Tenant to pay all expenses in connection with the assignment, and Landlord may require Tenant's assignee or transferee (or other assignees or transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease. See Paragraph 46 17. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold interest is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and buildings in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as "Lender") to Landlord, Tenant Shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender's deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease and provided Lender executes a reasonable non-disturbance agreement. Notwithstanding any such subordination, Tenant's possession under this Lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all rent and observe and perform all of the provisions set forth in this Lease and any such subordination agreement shall so reflect. 18. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times during business hours and after at least 24 hours notice (except in emergencies) have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to make repairs or provide any services to a contiguous tenant(s); to submit the Premises to prospective purchasers, mortgages or tenants; to post notices of nonresponsibility; and to alter, improve or repair the Premises or other parts of the building, all without abatement of rent, and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however that the business of Tenant shall be interfered with to the least extent that is reasonably practical. Any entry to the Premises by Landlord for the purposes provided for herein shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall use its best efforts to minimize its interference with Tenant's business operations during such entrance. 12 Initials:_______ Initials:_______ 13 19. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option, constitute a breach of this Lease by Tenant. If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption of this Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate assurance of future performance, as used herein, includes, but shall not be limited to: (i) assurance of source and payment of rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Lease will not breach substantially and provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating equity in the demised Premises to Tenant. In no event shall the leasehold estate under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord. In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period of five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustment thereto. Tenant shall have a period of thirty (30) days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that if the nature of Tenant's failure is such that more than thirty (30) days is reasonably required to cure the same. Tenant shall not be in default so long as Tenant commences performance within I such thirty (30) day period and thereafter prosecutes the same to completion. Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity: (a) The rights and remedies provided for by California Civil Code Section 1951.2, including but not limited to, recovery of the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select 13 Initials:______ Initials:______ 14 a licensed real estate broker in the business of renting property of the same type and use as the Premises and in the same geographic vicinity. Such two real estate brokers shall select a third licensed real estate broker, and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided from the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers should be final and binding upon the parties hereto. (b) The rights and remedies provided by California Civil Code Section which allows Landlord to continue the Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, for so long as Landlord does not terminate Tenant's rights to possession; acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. (c) The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. (d) To the extent permitted by law, the right and power, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and apply such proceeds therefrom pursuant to applicable California law. Landlord, may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the term of this Lease) and at such rent and such other terms as Landlord in its reasonable sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness other than rent due hereunder, the reasonable cost of such subletting, including, but not limited to, reasonable attorney's fees, and any real estate commissions actually paid, and the cost of such reasonable alterations and repairs incurred by Landlord and the amount, if any, by which the rent hereunder for the period of such subletting (to the extent such period does not exceed the term hereof) exceeds the amount to be paid as rent for the Premises for such period or (ii) at the option of Landlord, rents received from such subletting shall be applied first to payment of indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third to payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same becomes due hereunder. If Tenant has been credited with any rent to be received by such subletting under option (i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or if such rentals received from such subletting under option (ii) during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No taking possession of the Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention is given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time hereafter elect to terminate this Lease for such previous breach. (e) The right to have a receiver appointed for Tenant upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to subparagraph d. above. 14 Initials:______ Initials:______ 15 20. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time during the term of this Lease (except that Tenant may vacate so long as it pays rent, provides an on-site security guard during normal business hours form Monday through Friday, and otherwise performs its obligations hereunder) and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by the process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 21. DESTRUCTION In the event the Premises are destroyed in whole or in part from any cause, except for routine maintenance and repairs and incidental damage and destruction caused from vandalism and accidents for which Tenant is responsible under Paragraph 7, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction, or (b) Terminate this Lease. (providing that the Premises are damaged to the extent of 33 1/3% of the replacement cost). If Landlord does not give Tenant notice in writing within (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense, except for any deductible, which is the responsibility of Tenant, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction. Tenant shall be entitled to a reduction in rent while such repair is being made in proportion that the area of the Premises rendered untenantable by such damage bears to the total area of the Premises. If Landlord initially estimates that the rebuilding or restoration will exceed 180 days, or if Landlord does not commence repairs within 90 days or complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors, or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord), or if the damage exceeds 33 1/3% and occurs during the last twelve months of the initial Lease Term or any extended Term, then Tenant shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord's obligation to rebuild or restore shall be limited to the building and interior improvements constructed by Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense provided this Lease is not cancelled according to the provisions above. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than 33 1/3% of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be injured or not. Notwithstanding anything to the 15 Initials_______ Initials_______ 16 contrary herein, Landlord may terminate this Lease in the event of an uninsured event or if insurance proceeds are insufficient to cover one hundred percent of the rebuilding costs net of the deductible; provided however, Tenant shall have the right to elect, in its discretion, to contribute such excess funds to permit Landlord to repair the Premises. 22. EMINENT DOMAIN Landlord shall contest any eminent domain assertion if Landlord, in its sole and absolute discretion, believes it's prudent to do so. If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business; Tenant's personal property, moving cost or loss of goodwill shall be and remain the property of Tenant. If any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the premises or any portion thereof, then Landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place as of the first to occur of the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor. In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business, Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the lst day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. If a portion of the Premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 23. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the Premises or any interest therein, by any owner of the reversion then constituting Landlord, the transfer or shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Premises and this Lease. This Lease 16 Initials:_______ Initials:_______ 17 shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. 24. ATTORNMENT TO LENDER OR THIRD PARTY Subject to Tenant's receipt of an executed non-disturbance agreement pursuant to Paragraph 17 of this Lease, in the event the interest of Landlord in the land and buildings in which the leased Premises are located (whether such interest of Landlord is a fee title interest or a leasehold interest) is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee's foreclosure sale, Tenant hereby agrees to attorn to the purchaser at any such foreclosure sale and to recognize such purchaser as the Landlord under this Lease. In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the Lease, this Lease shall nonetheless continue in full force and effect for the remainder of the unexpired term hereof, at the same rental herein reserved and upon all of the other terms, conditions and convenants herein contained. 25. HOLDING OVER Any holding over by Tenant after expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease. Any holding over after the expiration or other termination of the term of this Lease, with the consent of Landlord, shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent required during the last month of the Lease term. 26. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than then (10) days prior written notice to Landlord execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrance of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord; that there are no uncured defaults in Landlord's performance, and that not more than one month's rent has been paid in advance. 27. CONSTRUCTION CHANGES LANDLORD shall endeavor to construct the Premises leased hereunder pursuant to Exhibit B to the Lease; however, it is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises, and no such changes shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. 17 Initials:_______ Initials:_______ 18 Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant. 28. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail to pay any sum of money, or other rent, required to be paid by it hereunder or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for five (5) days after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obliged to, make any such payment or perform any such other term or covenant on Tenant's part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment on performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 29. ATTORNEYS' FEES A. In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against the other party hereunder, then all costs and expenses, including reasonable attorneys' fees incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. B. Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including a reasonable attorney's fee subject to the provisions of Paragraph 13. 30. WAIVER The wavier by either party of the other party's failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of, or in any way affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. 31. NOTICES All notices, demands, requests, advices or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advices or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises of if sent 18 Initials:______ Initials:______ 19 by United States certified or registered mail, postage prepaid, addressed to Tenant at the Premises. All notices, demands, requests, advices or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission College Blvd., Suite 101, Santa Clara, CA 95054. Prior to Tenant's occupancy of the Premises, all notices by Landlord to Tenant shall be sent to Tenant's current offices at 1380 Willow Road, Menlo Park, CA 94025. Each notice, request, demand, advice or designation referred to in this paragraph shall be deemed received on the date of the personal service or, mailing thereof in the manner herein provided, as the case may be. 32. EXAMINATION OF LEASE Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. 33. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord's obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 34. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership), each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by-laws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease, deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 35. BASIC RENT ADJUSTMENT (Deleted) 36. LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder. Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (a) the sole and exclusive remedy shall be against Landlord's interest in the Premises leased herein; (b) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership); (c) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); 19 Initials:_____ Initials:_____ 20 (d) no partner of Landlord shall be required to answer or otherwise plead to any service of process (e) no judgment will be taken against any partner of Landlord; (f) any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing; (g) no writ of execution will ever be levied against the assets of any partner of Landlord; (h) these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 37. SIGNS No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or affix or in any way place a sign in, on, or about the Premises, upon expiration or other sooner termination of this Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and repair all damage in such a manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall, which may appear unsightly from outside the Premises. 38. MISCELLANEOUS AND GENERAL PROVISIONS A. Use of Building Name. Tenant shall not, without the written consent of Landlord, use the name of the building for any purpose other than as the address of the business conducted by Tenant in the Premises. B. Choice of Law; Severability. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. C. Definition of Terms. The term "Premises" includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto. The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord. The term "Tenant" or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations, and their and each of their respective heirs, executors, administrators, successors and permitted assigns, according to the context hereof, and the provisions of this Lease shall inure to the 20 Initials:_____ Initials:_____ 21 benefit of and bind such heirs, executors, administrators, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include other genders. If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof. D. Time of Essence. Time is of the essence of this Lease and of each and all of its provisions. E. Quitclaim. At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to Tenant, any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real property of which Tenant's Premises are a part. F. Incorporation of Prior Agreements; Amendments. This instrument along with any exhibits and attachments hereto, including the Construction Letter of even date, hereof, constitutes the entire agreement between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement. G. Recording. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other. H. Amendments for Financing. Tenant further agrees to execute any amendments required by a lender to enable Landlord to obtain financing, so long as Tenant's rights hereunder are not substantially affected. I. Additional Paragraphs. Paragraphs 39 through 54 are added hereto and are included as part of this lease. J. Clauses, Plats and Riders. Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof. K. Diminution of Light, Air or View. Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall in any way affect this Lease, entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant 21 Initials:______ Initials:______ 22 Paragraphs 39 through 54 to Lease Agreement Dated November 25, 1996, By and Between the Arrillaga Family Trust and the Richard T. Peery Separate Property Trust, as Landlord, and Versant Object Technology Corporation, a California corporation, as Tenant for 54,492+ Square Feet of Space Located at 6539 Dumbarton Circle, Fremont, California. 39. BASIC RENT Subject to Paragraphs 2A, 2B and 3 and in accordance with Paragraph 4A herein, the total aggregate sum of ELEVEN MILLION TWO HUNDRED SEVENTY NINE THOUSAND EIGHT HUNDRED FORTY FOUR AND NO/100 DOLLARS ($11,279,844.00), shall be payable as follows: On June 1, 1997, the sum of EIGHTY ONE THOUSAND SEVEN HUNDRED THIRTY EIGHT AND NO/100 DOLLARS ($81,738.00) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 1998. On June 1, 1998, the sum of EIGHTY FOUR THOUSAND FOUR HUNDRED SIXTY TWO AND 60/100 DOLLARS ($84,462.60) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 1999. On June 1, 1999, the sum of EIGHTY SEVEN THOUSAND ONE HUNDRED EIGHTY SEVEN AND 20/100 DOLLARS ($87,187.20) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 2000. On June 1, 2000, the sum of EIGHTY NINE THOUSAND NINE HUNDRED ELEVEN AND 80/100 DOLLARS ($89,911.80) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 2001. On June 1, 2001, the sum of NINETY TWO THOUSAND SIX HUNDRED THIRTY SIX AND 40/100 DOLLARS ($92,636.40) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 2002. On June 1, 2002, the sum of NINETY FIVE THOUSAND THREE HUNDRED SIXTY ONE AND NO/100 DOLLARS ($95,361.00) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 2003. On June 1, 2003, the sum of NINETY EIGHT THOUSAND EIGHTY FIVE AND 60/100 DOLLARS ($98,085.60) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 2004. On June 1, 2004, the sum of ONE HUNDRED THOUSAND EIGHT HUNDRED TEN AND 20/100 DOLLARS ($100,810.20) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 2005. 22 Initials:______ Initials:______ 23 On June 1, 2005, the sum of ONE HUNDRED THREE THOUSAND FIVE HUNDRED THIRTY FOUR AND 80/100 DOLLARS ($103,534.80) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 2006. like sum due on the first On June 1, 2006, the sum of ONE HUNDRED SIX THOUSAND TWO HUNDRED FIFTY NINE AND 40/100 DOLLARS ($106,259.40) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 2007; or until the entire aggregate sum of ELEVEN MILLION TWO HUNDRED SEVENTY NINE THOUSAND EIGHT HUNDRED FORTY FOUR AND NO/100 DOLLARS ($11,279,844.00) has been paid. 40. CONSENT: Whenever the consent of one party to the other is required hereunder, such consent shall not be unreasonably withheld. 41. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby warrant and represent that they are properly authorized to execute this Lease Agreement and bind the parties on behalf of whom they execute this Lease Agreement and to all of the teens, covenants and conditions of this Lease Agreement as they relate to the respective parties hereto. 42. EXPENSES OF OPERATION, MANAGEMENT AND MAINTENANCE OF THE DRIVEWAY, PARKING LOT AND LANDSCAPED AREAS OF THE PARCEL, ON WHICH THE PREMISES ARE LOCATED: It is understood by Landlord and Tenant that the areas outlined in Orange on Exhibit A attached hereto are considered Common Areas; said Common Areas are limited to the cave way entrance; the fountain (if any) and landscaping included in said Common Areas. Landlord shall maintain, repair and replace as needed said improvements within the Common Areas and Tenant shall pay its pro-rata share of the total costs for all such work completed in the Common Areas; unless, however, Tenant is responsible for damage to the same which has resulted in said repairs and/or replacement, in which case Tenant shall pay one hundred percent (100%) of said costs. Landlord shall also maintain on behalf of Tenant, the non-Common Area landscape areas, asphalt paved areas (including the Parking Lot) and sidewalks on the Premises and Tenant shall pay one hundred percent (100%) of those costs. The cost incurred in both the Common Areas and non-Common Areas include, but are not limited to license, permit and inspection fees; utility charges associated with exterior landscaping and lighting, all charges incurred in the maintenance, repair and replacement as necessary of the: landscaped areas, fountains (if any), parking lots, parking lot lighting, sidewalks, driveways, maintenance, repair and replacement of all fountains (if any) and fountain related fixtures and electrical, mechanical and plumbing systems; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of fifteen ( 15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. Tenant hereby waives all rights hereunder, and benefits of, 23 Initials:______ Initials:______ 24 subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. Said costs for Tenant shall pay services provided by Landlord as Additional Rent in accordance with Paragraph 4D of the Lease. 43. ADDITIONAL RENT CONTINUED: Notwithstanding anything to the contrary in Paragraph 4D, the following items shall be excluded from "Additional Rent": 1. Leasing commissions, attorney's fees, costs, disbursements, and other expenses incurred in connection with negotiations with other tenants, or disputes between Landlord and other tenants, or in connection with leasing, renovating, or improving space outside the Leased Premises for other current or prospective tenants or other current or prospective occupants of the Complex. 2. The cost of any service sold to any other tenant or other occupant for which Landlord is entitled to be reimbursed as an additional charge or rental over and above the basic rent and escalations payable under the lease with said other tenant or other occupant. 3. Any costs for which Landlord is reimbursed by others. 4. Any costs, fines, or penalties incurred due to violations by Landlord of any governmental rule or authority. 44. ASSIGNMENT OF WARRANTIES: During the Term of the Lease, Landlord hereby assigns to Tenant all of Landlord's Contractor's warranties and shall cooperate with Tenant in enforcing any of such warranties except that Landlord shall not be required to pay any legal fees or incur any expenses in this regard. 45. ASSESSMENT CREDITS: The demised property herein may be subject to a special assessment levied by the City of Fremont as part of an Improvement District. As a part of said special assessment proceedings (if any), additional bonds were or may be sold and assessments were or may be levied to provide for construction contingencies and reserve funds. Interest shall be earned on such funds created for contingencies and on reserve funds, which will be credited for the benefit of, said assessment district. To the extent surpluses are created in said district through unused contingency funds, interest earnings or reserve funds, such surpluses shall be deemed the property of Landlord. Notwithstanding that such surpluses may be credited on assessments otherwise due against the Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the time of any such credit of surpluses, an amount equal to all such surpluses so credited For example: if (i) the property is subject to an annual assessment of $1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's assessment which reduces the assessment amount shown on the property tax bill from $1,000.00 to $800.00, Tenant shall, upon receipt) of notice from Landlord, pay to Landlord said $200.00 credit as Additional Rent. 24 Initials:______ Initials:______ 25 46. ASSIGNMENT AND SUBLETTING (CONTINUED): A. In addition to and notwithstanding anything to the contrary in Paragraph 16 of this Lease, Landlord hereby agrees to consent to Tenant's assigning or subletting said Lease and not to receive any Excess Rent (as described in Paragraph 16) to: (i) any parent or subsidiary corporation, affiliate, or corporation with which Tenant merges or consolidates, provided that the net worth of said parent or subsidiary corporation, affiliate, or said corporation has a net worth equal to or greater than the net worth of Tenant at the time of such assignment, merger, or consolidation; or (ii) any third party or entity to whom Tenant sells all or substantially all of its assets; provided, that the net worth of the resulting or acquiring corporation has a net worth after the merger, consolidation or acquisition equal to or greater than the net worth of Tenant at the time of such merger, consolidation or acquisition. No such assignment or subletting will release the Tenant from its liability and responsibility under this Lease to the extent Tenant continues in existence following such transaction. Notwithstanding the above, Tenant shall be required to (a) give Landlord written notice prior to such assignment or subletting to any party as described in (i) and (ii) above, and (b) execute Landlord's consent document prepared by Landlord reflecting the assignment or subletting. B. Any and all sublease agreement(s) between Tenant and any and all subtenant(s) (which agreements must be consented to by Landlord, pursuant to the requirements of this Lease) shall contain the following language: "If Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease termination date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Landlord, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity against Landlord to challenge such an early termination of the Sublease, and unconditionally releases and relieves Landlord, and its officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor. The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, ((b)) Subtenant's acknowledgment that, in determining the net benefits to be derived 25 Initials:______ Initials:______ 26 by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. 47. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to the existence or use of "Hazardous Materials" (as defined herein) on, in, under or about the Premises and real property located beneath said Premises and the common areas of the Parcel, which includes the entire parcel of land on which the Premises are located as shown in Green on Exhibit A attached hereto (hereinafter collectively referred to as the "Property"): A. As used herein, the term "Hazardous Materials" shall mean any material, waste, chemical, mixture or byproduct which is or hereafter is defined, listed or designated under Environmental Laws ((defined below) as a pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or material, or any other unwholesome, hazardous, toxic, biohazards, or radioactive material, waste, chemical, mixture or byproduct, or which is listed, regulated or restricted by any Environmental Law, / (including, without limitation, petroleum hydrocarbons or any distillates or derivatives or fractions thereof, polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental Laws" shall mean any applicable Federal, State of California or local government law (including common law) statute, regulation, rule, ordinance, permit, license, order, requirement, agreement, or approval, or any determination, judgment, directive, or order of any executive or judicial authority at any level of Federal, State of California or local government (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, ecology, natural resources, or public health and safety. B. Tenant shall obtain Landlord's written consent, which may be withheld in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous Materials Activities (defined below); provided, however, that Landlord's consent shall not be required for normal use in compliance with applicable Environmental Laws of customary household and office supplies (Tenant shall first provide Landlord with a list of said materials use), such as mild cleaners, lubricants and copier toner. As used herein, the term "Tenant's Hazardous Materials Activities" shall mean any and all use, handling, generation, storage, disposal, treatment, transportation, discharge, or emission of any Hazardous Materials on, in, beneath, to, from, at or about the Property, in connection with Tenant's use of the Property, or by Tenant or by any of Tenant's agents, employees, contractors, vendors, invitees, visitors or its future subtenants or assignees. Tenant agrees that any and all Tenant's Hazardous Materials Activities shall be conducted in strict, full compliance with applicable Environmental Laws at Tenant's expense, and shall not result in any contamination of the Property or the environment. Tenant agrees to provide Landlord with prompt written notice of any spill or release of Hazardous Materials at the Property during the term of the Lease of which Tenant becomes aware, and further agrees to provide Landlord with prompt written notice of any violation of Environmental Laws in connection with Tenant's Hazardous Materials Activities of which Tenant becomes aware. If Tenant's Hazardous Materials Activities involve Hazardous Materials other than normal use of customary household and office supplies, Tenant also agrees at Tenant's expense: (i) to install such Hazardous Materials monitoring, storage and containment devices as Landlord reasonably deems necessary (Landlord shall have no obligation to evaluate the need for any such installation 26 Initials:_____ Initials:_____ 27 or to require any such installation); (ii) provide Landlord with a written inventory of such Hazardous Materials, including an update of same each year upon the anniversary date of the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each Anniversary Date, to retain a qualified environmental consultant, acceptable to Landlord, to evaluate whether Tenant is in compliance with all applicable Environmental Laws with respect to Tenant's Hazardous Materials Activities. Tenant, at its expense, shall submit to Landlord a report from such environmental consultant, which discusses the environmental consultant's findings within two (2) months of each Anniversary Date. Tenant, at its expense, shall promptly undertake and complete any and all steps necessary, and in full compliance with applicable Environmental Laws, to fully correct any and all problems or deficiencies identified by the environmental consultant, and promptly provide Landlord with documentation of all such corrections. C. Prior to termination or expiration of the Lease, Tenant, at its expense, shall (i) properly remove from the Property all Hazardous Materials which come to be located at the Property in connection with Tenant's Hazardous Materials Activities, and (ii) fully comply with and complete all facility closure requirements of applicable Environmental Laws regarding Tenant's Hazardous Materials Activities, including but not limited to (x) properly restoring and repairing the Property to the extent damaged by such closure activities, and (y) obtaining from the local Fire Department or other appropriate governmental authority with jurisdiction a written concurrence that closure has been completed in compliance with applicable Environmental Laws. Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any such closure activities. D. If Landlord, in its sole discretion, believes that the Property has become contaminated as a result of Tenant's Hazardous Materials Activities, Landlord in addition to any other rights it may have under this Lease or under Environmental Laws or other laws, by providing advance written notice, may enter upon the Property and conduct inspection, sampling and analysis, including but not limited to obtaining and analyzing samples of soil and groundwater, for the purpose of determining the nature and extent of such contamination. Tenant shall promptly reimburse Landlord for the reasonable costs of such an investigation, including but not limited to reasonable attorneys' fees Landlord incurs with respect to such investigation, that discloses Hazardous Materials contamination for which Tenant is liable [under this Lease. Except as may be required of Tenant by applicable Environmental Laws, Tenant shall not perform any sampling, testing, or drilling to identify the presence of any Hazardous Materials at the Property, without Landlord's prior written consent which may be withheld in Landlord's discretion. Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any sampling, testing or drilling performed pursuant to the preceding sentence. E. Tenant shall indemnify, defend (with legal counsel acceptable to Landlord, whose consent shall not unreasonably be withheld) and hold harmless Landlord, its employees, assigns, successors, successors-in-interest, agents and representatives from and against any and nil claims (including but not limited to third party claims from a private party or a government authority), liabilities, obligations, losses, causes of action, demands, governmental proceedings or directives, fines, penalties, expenses, costs (including but not limited to reasonable attorneys', consultants' 27 Initials:_____ Initials:_____ 28 and other experts' fees and costs), and damages, which arise from or relate to: (i) Tenant's Hazardous Materials Activities; (ii) releases or discharges of I Hazardous Materials at the Property, which occur during the Term of this Lease, (iii) any Hazardous Materials contamination caused by Tenant prior to the Commencement Date of the Lease; or (iv) the breach of any obligation of Tenant under this Paragraph 47 (collectively, "Tenant's Environmental Indemnification"). Tenant's Environmental Indemnification shall include but is not limited to the obligation to promptly and fully reimburse Landlord for losses in or reductions to rental income, and diminution in fair market value of the Property. Tenant's Environmental Indemnification shall further include but is not limited to the obligation to diligently and properly implement to completion, at Tenant's expense, any and all environmental investigation, removal, remediation, monitoring, reporting, closure activities, or other environmental response action (collectively, "Response Actions"). Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any Response Actions. As evidenced by their initials set forth immediately below, Tenant acknowledges that Landlord has provided Tenant with copies of the environmental reports listed on Exhibit C ("Reports"), and Tenant acknowledges that Tenant and Tenant's experts (if any) have had ample opportunity to review such reports and that Tenant has satisfied itself as to the environmental conditions of the Property and the suitability of such conditions for Tenant's intended use of the Property. To the best of Landlord's knowledge as of the date of this Lease, except as noted in said reports, no additional on site Hazardous Materials contamination exist on the Property, however. Landlord shall have no obligation to further investigate. It is agreed that the Tenant's responsibilities related to Hazardous Materials will survive the expiration or termination of this Lease and that Landlord may obtain specific performance of Tenant's responsibilities under this Paragraph 47. 48. ASSOCIATION DUES: The Premises leased hereunder is part of the Ardenwood Property Owner's Association (the "Association"), and is subject to Association Dues to fund the cost of the Association's obligations and expenses as authorized under said Agreement. As of the date of this Lease, Tenant's current prorate share of the Association Dues is currently estimated at $2,468.49 per year and is subject to adjustment as provided for by said Association Said Association Dues are payable by Tenant to Landlord as Additional Rent on a monthly basis throughout the Term of this Lease. Tenant understands that it will not be a direct member of the Association. 49. TAXES CONTINUED: A. In addition to and notwithstanding anything to the contrary contained in Paragraph 9, it is agreed that Tenant shall have the right to request Landlord to contest, or to have contested, the real estate taxes end/or assessments levied against the Premises leased hereunder with the 28 Initials:_____ Initials:_____ 29 specific understanding and agreement that any such contest shall in no way and in no event relieve Tenant from Tenant's responsibility to pay all real estate taxes and assessments as they appear on the tax bill as they become due. In the event any such tax contest is successful, the proportionate portion of the net refund, once received by Landlord, relating to real estate taxes and assessments actually paid by Tenant shall be refunded to Tenant. It is further understood and agreed that Landlord shall in no event be responsible for any liability or for any cost or expense incurred by Tenant by reason of Tenant's contest of such taxes and/or assessments. B. Notwithstanding anything within Paragraph 9, in the event prior to the Commencement Date there is an interim or supplemental reassessment of the Premises based upon the added value of the Improvements, then when Tenant accepts occupancy of the Premises Tenant shall pay any interim or supplemental taxes (but no penalties or interest in connection therewith) that have been levied against the Premises so are attributable to the added value of the Improvements (as defined in the Construction Letter of even date herewith) during the period prior to Tenant's occupancy of the Premises. As of the Lease Commencement Date, Tenant shall be responsible for paying one hundred percent (100%) of the Real Property Taxes as provided for in Paragraph 9. C. Notwithstanding anything within Paragraph 9, it is agreed that if any special assessments for capital improvements are assessed, and if Landlord has the option to either pay the entire assessment in cash or go to bond, and if Landlord elects to pay the entire assessment in cash in lieu of going to bond, the entire portion of the assessment assigned to Tenant's Leased Premises will be prorated over the same period that the assessment would have been prorated had the assessment gone to bond. 50. SUBDIVISION: Landlord an Tenant agree that the Premises and the Parcel outlined in Green on Exhibit A attached hereto are subject to change and/or modification once the parcel lot lines are adjusted and said revised parcel dimensions are recorded. The parities agree that Exhibit A shall be replaced with a revised and corrected Exhibit A-1, indicating any revisions to the site plan, including specific parking stall locations and/or lot line adjustments. 51. ADDRESS FOR LEASED PREMISES: It is understood that (I) the current address for the building in which the Premises are located is 6539 Dumbarton Circle, Fremont, California, and that (ii) the address for the Premises will be assigned by the City of Fremont (the "City") upon issuance of a building permit for the Interior Improvements as defined herein. In the event the address assigned to the Premises is changed by the City, said Lease shall thereafter be amended to reflect the assigned address for the Premises leased hereunder. 52. OPTION TO EXTEND LEASE FOR FIVE (5) YEARS: Provided Tenant is not in default (pursuant to Paragraph 19 of the Lease, i.e., Tenant has received notice and any applicable cure period has expired without cure) in any of the terms, covenants, and conditions of this Lease Agreement, Landlord hereby grants to Tenant and Option to Extend this Lease Agreement for an additional five (5) year period upon the following terms and conditions: 29 Initials:_____ Initials:_____ 30 A. Tenant shall give Landlord written notice of Tenant's exercise of this Option to Extend not later that twelve (12) months prior to the scheduled Lease Termination Date, which Termination Date is currently projected to May 31, 2007, in which event the Lease shall be considered extended for an additional five (5) years subject to the Basic Rental set forth below and with: (i) the terms and conditions subject to amendment by Landlord (landlord, in its sole and absolute discretion, may, but is not required to, incorporate its current Lease provision that are standard in Landlord's leases as of the date of Tenant's exercise of its Option to Extend); and (ii) this Paragraph 52 deleted. In the event that Tenant fails to timely exercise Tenant's option as set forth herein in writing, Tenant shall have no further Option to Extend this Lease, and this Lease shall continue in full force and effect for the full remaining term hereof, absent this Paragraph 52. B. In the event Tenant timely exercises Tenant's Option to Extend as set forth herein, Landlord shall, within fifteen (15) days after receipt of Tenant's exercise of option, advise Tenant of the Basic Rental required for the Extended Term of the Lease. The initial monthly Basic Rent charged during the Extended Term shall be the higher of: (I) $2.00 per square foot per month or (ii) an amount equal to the monthly Basic Rent during the last month of the initial Lease Term. Said initial monthly Basic Rent, once established, shall be subject to annual adjustment during the Extended Term by, at Landlord's sole and absolute discretion, either (a) a fixed increase of $0.50 per square foot per month or (b) the annual increase in the Consumer Price Index. Tenant shall have five (5) days after receipt from the Landlord of said new Basic Rental in which to accept said new Basic Rental and enter into written documentation confirming it. In the event Tenant fails to execute said written documentation confirming said new Basic Rental for the Extended Term of Lease within said (5) day period, Tenant shall have no further Option to Extend this Lease, and this Lease shall continue in full force and effect for the full remaining term hereof absent of this Paragraph 52, with Landlord having no further responsibility or obligation to Tenant with respect to Tenant's Option to Extend. C. The option rights of Tenant under this Paragraph 52, and the Extended Term thereunder, are granted for Tenant's personal benefit and may not be assigned or transferred by Tenant, (except to a parent or subsidiary corporation, or corporation with which Tenant merges or consolidates or the whim Tenant sells all or substantially all of its assets as provided for in Paragraph 46A), either voluntarily or by operation of law, in any manner whatsoever. In the event that Landlord consents to a sublease or assignment under Paragraph 10, the option granted herein and any Extended Term thereunder shall be void and of no force and effect, whether or not Tenant shall have purported to exercise such option prior to such assignment or sublease. D. INCREASED SECURITY DEPOSIT: In the event the Term of Tenant's Lease is extended pursuant to this Paragraph 52, Tenant's Security Deposit shall be increased to equal twice the Basic Rental due for the last month of the Extended Term (For Example: if the last month's Basic Rental during the Extended Term is $92,400.00, the revised Security Deposit shall be $184,800.00 ($92,400.00 per month X2)). 30 Initials:_____ Initials:_____ 31 53. LANDLORD'S RIGHT TO TERMINATE: It is understood that the Premises to be leased by Tenant are to be constructed by Landlord, and that Landlord is required to obtain the necessary building permits before construction of said Premises can commence. Therefore it is agreed that in the event Landlord cannot obtain all the necessary building permits for said Premises within 180 days from the date this executed Lease is received by Landlord, that Landlord can terminate this Lease Agreement without any liability to Tenant, of any type whatsoever, and that this Lease Agreement will be null and void as of the date of said cancellation. Landlord agrees to use its best efforts to obtain the required permits within the aforementioned 1 80-day period. 54. MAINTENANCE OF THE PREMISES: Notwithstanding anything to the contrary in Paragraph 7, Landlord shall repair damage to the structural shell, foundation, and roof structure (but not the interior improvements, roof membrane, or glazing) of the building leased hereunder at Landlord's cost, Landlord shall amortize the cost of the repair over the useful life of said repair, and Tenant shall be responsible for paying to Landlord one hundred percent (100%) of Tenant's pro rata share of the amortization of said COSI over the full Term remaining in the Lease at the time the repair is made; provided Tenant has not caused such damage, in which event Tenant shall be responsible for 100 percent of any such costs for repair or damage so caused by the Tenant. For Example: In the event (i) the roof purlin is repaired at a cost of $ 10,000, and (ii) said repair purlin has a useful life of twenty years, and (iii) Tenant has one year remaining in its Lease Term al the time said repair was made, Tenant would be charged its prorate share of $500 ($10,000/20 years x 1 year = $500)) as Additional Rent, in which case said amount would be due within thirty (30) days of notice from Landlord. Tenant hereby waives all rights under, and benefits of subsection I of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. Notwithstanding the foregoing, a crack in the foundation or exterior walls that does not endanger the structural integrity of the building, or which is not life-threatening, shall not be considered material, nor shall Landlord be responsible for repair of same. In the event the Term of the Lease is extended, pursuant to Paragraph 52 ("Option to Extend Lease for Five (5) Years") or by any other agreement between Landlord and Tenant, Tenant's pro rata share of the earlier repair cost shall be increased to include the additional amount payable IO Landlord due IO the Extended Term of the Lease. For Example: In the event: (i) the roof purlin was repaired as illustrated above; and (ii) Tenant exercises its Option to Extend this Lease for an additional five year period, Tenant would be liable for an additional payment to Landlord of $2,500 as Additional Rent. Said payment would be due in full immediately upon Tenant's exercise of its Option to Extend. 31 Initials:______ Initials:______ 32 IN WITNESS WHEREOF, Landlord or Tenant have executed and delivered this Lease as of the day and year last written below. LANDLORD: TENANT: ARRILLAGA FAMILY TRUST VERSANT OBJECT TECHNOLOGY CORPORATION a California corporation By: ____________________________ By: _____________________________________ John Arrillaga, Trustee Date: ___________________________ Title: _____________________________________ RICHARD T. PEERY, SEPARATE Type or Print Name: ______________________________ PROPERTY TRUST By: _____________________________ Date: ___________________________________________ Richard T. Peery, Trustee Date: ____________________________ 32 Initials:______ Initials:______ 33 MAP OF FACILITY SITE Exhibit A To lease agreement dated November 25, 1996 by and between the Arrillaga Family Trust and the Richard T. Peery Separate Property Trust, as Landlord, and Versant Object Technology Corporation, as Tenant. 33 Initials:______ Initials:______ 34 PRELIMINARY PLAN VERSANT OBJECT TECHNOLOGY BUILDING Exhibit B To lease agreement dated November 25, 1996 by and between the Arrillaga Family Trust and the Richard T. Peery Separate Property Trust, as Landlord, and Versant Object Technology Corporation, as Tenant. 34 Initials:______ Initials:______ 35 $ 106,259.40 Building: Ardenwood II-I Date Due: June 1, 1998 PROMISSORY NOTE THE UNDERSIGNED, Versant Object Technology Corporation, a California corporation, , hereby promises, covenants and agrees to pay to the Arrillaga Family Trust and the Richard T. Peery Separate Properly Trust, at Santa Clara, California, the principal sum of ONE HUNDRED SIX THOUSAND TWO HUNDRED FIFTY NINE AND 40/100 DOLLARS ($ 106,259.40) without interest on or before June 1, 1998. This sum is final payment of a Security Deposit provided for in accordance with the Lease Agreement between the parties dated November 25, 1996, for approximately 54,492+ square feet of space located at 6539 Dumbarton Circle, Fremont, California. The parties' rights to payment, nonpayment or refund of the sum due under this Note shall be governed solely by the above Lease Agreement. IN THE EVENT the undersigned defaults in the timely payment of this Note, the undersigned shall pat to holder, in addition to the principal sum due hereunder, interest thereon at the then existing highest interest rate chargeable by law from June 1, 1997 until this Note is paid in full. IN THE EVENT legal action is taken to enforce the provisions of this Note, the undersigned, does promise, covenant, and agree to pay, in addition to the principal due hereunder and any interest accrued thereon, attorney fees and/or court costs incurred by Holder by reason of such enforcement of the provisions herein contained whether or not such action is prosecuted to judgement. THIS NOTE shall be governed and construed according to the laws of the State of California. IN WITNESSES WHEREOF, the undersigned have/has executed this Promissory Note as of the 7th day of February, 1997. VERSANT OBJECT TECHNOLOGY CORPORATION a California corporation By RICHARD I. KADET VICE PRESIDENT Type or Print Name Title 35 Initials:_____ Initials:_____ EX-11.01 3 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.01 COMPUTATION OF NET INCOME (LOSS) PER SHARE Year Ended Year Ended December 31, 1996 December 31, 1995 ----------------- ----------------- Net income (loss) $ 1,410,800 $ (1,232,187) =========== ============ Weighted average number of shares outstanding: Common stock 5,930,599 2,987,199 Common stock equivalents: Convertible preferred shares 1,299,510 2,367,424 SAB 83 Calculation 182,430 578,716 Warrants 556 0 Options 367,525 0 ----------- ----------- 7,780,620 5,933,339 =========== =========== Net income (loss) per share $ 0.18 $ (0.21) ======= ======= EX-23.01 4 CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT ACCTS. 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-KSB, into the Company's previously filed Registration Statement on Form S-8 (File No. 333-08537). ARTHUR ANDERSEN LLP San Jose, California March 28, 1997 EX-27.01 5 FINANCIAL DATA SCHEDULE
5 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. 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 5,267 14,716 5,350 603 0 198 3,999 3,324 25,688 6,001 0 0 0 40,889 (21,615) 25,688 18,393 18,393 0 4,131 13,151 0 58 1,540 129 1,411 0 0 0 1,411 0.18 0.18
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