**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

| **ý** | **Annual report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the fiscal year ended October 31, 2002.** |
|------------|---------------------------------------------------------------------------------------------------------------------------------------|
|       |
| **or**     |
|       |
| **o**      | **Transition report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the transition period**               |

 

**Commission file number: 0-28540**

 

**VERSANT CORPORATION**

(Exact name of Registrantas specified in its charter)

 

| **California**                                                               |   | **94-3079392**                        |
|------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization)             |   | (I.R.S. Employer  Identification No.) |
|                                                                         |   |                                  |
| **6539 Dumbarton Circle, Fremont,  California 94555**                        |
| (Address of principal  executive offices) (Zip code)                         |
|                                                                         |   |                                  |
| Registrant’s telephone  number, including area code: **(510) 789-1500** |
|                                                                         |   |                                  |
| Securities registered  pursuant to Section 12(b) of the Act:                 |
| **None**                                                                     |
|                                                                         |   |                                  |
| Securities registered  pursuant to Section 12(g) of the Act:                 |
| **Common Stock, no par value**                                               |
| (Title of Class)                                                             |

 

Indicate by check mark whether the Registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý    No o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2).  Yes oNo ý

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor an amendment to Form 10-K. ý

 

As of April 30, 2002 (the last business day of our most recentlycompleted second fiscal quarter), the aggregate market value of the shares ofcommon stock, no par value, held by non-affiliates of the Registrant (based onthe closing price of $1.43 for the Registrant’s common stock on the NasdaqNational Market on April 30, 2002), was approximately $15,938,778.57.  This amount excludes 1,118,955 shares ofcommon stock held by directors, officers and certain shareholders of theRegistrant as of April 30, 2002. Exclusion of shares held by any person should not be construed toindicate that that person possesses power, direct or indirect, to direct orcause the direction of the management or policies of the Registrant, or thatthat person is controlled by or is under common control with the Registrant.

 

As of January 21, 2003, there were outstanding14,833,568 shares of the Registrant’s common stock, no par value.

 

 

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**VERSANT CORPORATION**

**ANNUALREPORT ON FORM 10-K**

**For thePeriod from November 1, 2001 to October 31, 2002**

 

 

**TABLE OF CONTENTS**

 
| **Item No.**   |   | **Name of  Item**                                                                                 |
|----------------|--------|---------------------------------------------------------------------------------------------------|
|           |   |                                                                                              |
| **PART I**     |
| Item 1.        |   | Business.                                                                                         |
|           |   |                                                                                              |
| Item 2.        |   | Properties.                                                                                       |
|           |   |                                                                                              |
| Item 3.        |   | Legal Proceedings.                                                                                |
|           |   |                                                                                              |
| Item  4.       |   | Submission  of Matters to a Vote of Security Holders.                                             |
|           |   |                                                                                              |
| Item  4A.      |   | Executive  Officers of the Registrant.                                                            |
|           |   |                                                                                              |
| **PART II**    |
|           |   |                                                                                              |
| Item  5.       |   | Market  for Registrant’s Common Equity and Related Stockholder Matters.                      |
|           |   |                                                                                              |
| Item 6.        |   | Selected Financial  Data.                                                                         |
|           |   |                                                                                              |
| Item  7.       |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations.      |
|           |   |                                                                                              |
| Item  7A.      |   | Quantitative  and Qualitative Disclosures About Market Risk.                                      |
|           |   |                                                                                              |
| Item  8.       |   | Financial  Statements and Supplementary Data.                                                     |
|           |   |                                                                                              |
| Item  9.       |   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure.            |
|           |   |                                                                                              |
| **PART III**   |
|           |   |                                                                                              |
| Item  10.      |   | Directors  and Executive Officers of the Registrant.                                              |
|           |   |                                                                                              |
| Item 11.       |   | Executive  Compensation.                                                                          |
|           |   |                                                                                              |
| Item  12.      |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters. |
|           |   |                                                                                              |
| Item  13.      |   | Certain  Relationships and Related Transactions.                                                  |
|           |   |                                                                                              |
| Item 14.       |   | Controls and  Procedures.                                                                         |
|           |   |                                                                                              |
| Item  15.      |   | Exhibits,  Financial Statement Schedules and Reports on Form 8-K.                                 |
|           |   |                                                                                              |
| Signatures     |   |                                                                                              |
|           |   |                                                                                              |
| Certifications |   |                                                                                              |

 

Versantâand enJinâ  areregistered trademarks of our company in the United States and/or othercountries.  Other parties’ marks (suchas, IBM’s WebSphere and BEA’s WebLogic,) are the property of their respectiveowners and should be treated as such.

 

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**CAUTION REGARDING FORWARD-LOOKING STATEMENTS**

 

*This Form 10-K contains forward-looking statements withinthe meaning of Section 21E of the Securities Exchange Act of 1934 and Section27A of the Securities Act of 1933. These forward-looking statements are based on our current expectationsabout our business and industry, which reflect our beliefs and assumptionsbased upon information that is reasonably available to us at the date of thisreport.  In many cases you may identifythese forward-looking statements by words such as “will,” “should,” “may,”“might, “believes,” “anticipates,” “expects,” “intends,” “estimates” andsimilar expressions.  In other (but notall) cases we have identified sentences containing forward-looking statementsby preceding the sentence with an asterisk; These forward-looking statements include, among other things,projections of our future financial performance and trends anticipated for ourbusiness.*

 

*We caution investors that forward-looking statements areonly predictions or estimates based upon our current expectations about futureevents.  The forward-looking statementsare not guarantees of future performance and are subject to significant risksand uncertainties that are difficult to predict.  Our actual results and performance may differ materially from theresults and performance anticipated by any forward-looking statements due tothese risks and uncertainties. Some of the important risks and factors thatcould cause our results and performance to differ from results or performanceanticipated by this report are discussed in Item 7 of this report,“Management’s Discussion and Analysis of Financial Condition and Results ofOperation - Risk Factors,” which you should read carefully.    We undertake no obligation to revise orupdate any forward-looking statements in order to reflect events orcircumstances that may arise or occur after the date of this report or for anyother reason.  Readers are urged to carefullyreview and consider the various disclosures made by us in this report and inour other reports filed with the Securities and Exchange Commission thatattempt to advise interested parties of the risks and factors that may affectour business.*

 

**PART I**

 

**Item 1.  Business.**

 

**Overview**

 

We are a leading provider of object-oriented datamanagement software that forms a critical component of an enterprise’scomputing infrastructure.  Companies useour solutions to solve complex data management problems.  To address these problems, we design, develop,market and support object management systems, including database managementsystems, as well as products that perform data replication and accelerate andenhance Internet transactions.  We alsoprovide related product support, training and consulting services to assistusers in developing and deploying applications based on our products.  We were incorporated in California in August1988 as Object Sciences Corporation and completed the initial public offeringof our common stock in July 1996. In 1999 we issued Series A Preferred Stock toprivate investors in private offerings. Our principal executive offices are located at 6539 Dumbarton Circle,Fremont, California 94555, and our telephone number is  (510) 789-1500.

 

Our products are used primarily by larger enterprises,such as telecommunications carriers and financial services companies, that havesignificant large-scale data management requirements.  These data management needs can involve many business functions,ranging from management of the use and sharing of a company’s internalenterprise data to the processing of externally originated information such ascustomer enrollment, billing and payment transaction data.  Our object-based solutions have also been usedto solve complex data management issues such as fraud detection, risk analysisand yield management.  Our products aredeployed both in client-server environments and on application and web serversfor distributed computing environments, such as the growing e-businessmarketplace.

 

Our initial flagship product, Versant Developer Suiteor VDS (formerly ODBMS), is a sixth generation object database managementsystem that combines native support for object-oriented languages with highperformance database functionality and a client-server architecture.  VDS enables users to store, manage anddistribute information that we believe often cannot be supported effectively bytraditional database technologies, including information of the followingtypes:

 

•                  abstract data,such as graphics, images, video, audio and unstructured text;

 

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•                  dynamic,graph-oriented data, such as network management data and advanced financialinstruments; and

•                  metadata, dataaiding integration of diverse systems, and workflow information, which takentogether enable the construction of systems that integrate diverse systems andadd new functionality, often making it available over the Internet.

 

VDS is also thefoundation for our e-business product suite, Versant enJin.  Versant enJin is a Java development andruntime platform designed to enhance performance and scalability of Java 2Enterprise Edition, or J2EE, compliant application servers such as IBMWebSphere and BEA WebLogic.  VersantenJin extends the functionality and power of VDS to Internet-based transactionsby enabling our object management technology to drive J2EE-based applications.

 

Our VDS and Versant enJinproducts provide customers the following benefits:

 

•                  HighPerformance.  Our object-basedarchitecture provides direct access or navigation to stored objects.  Its balanced client-server architectureenhances performance by efficiently distributing processing burdens betweenclients and servers to leverage the processing power of networked computers.

 

•                  HighlyScalable Support for Distributed Computing.  Through object-level operations, compatibility with Web browsersand other design features, our products can be scaled from small workgroupoperations to thousands of users over wide area networks or the Internet.

 

•                  Reliability,Availability and Serviceability. VDS and Versant enJin offer a number of features designed to permitcontinuous operation, including features providing online backup and recoveryand online modification of the database system, as well as system utilitiesthat can operate while the system is running. These features, together with replication and disk mirroring provided byour Fault Tolerant Server, support operations 24 hours per day, 365 days peryear.

 

•                  Language-IndependentSupport for Object-Oriented Programming. Our products provide native support for the leading object-orientedsoftware development languages -C++ and Java. This support facilitates rapid and flexible development, maintenance andevolution of complex, dynamic applications that closely model real-worldsystems and processes.

 

•                  Support forComponent Architectures.  VersantenJin integrates with leading J2EE application servers, including the IBMWebSphere and BEA Weblogic application servers. These application serversenable users to build and deploy J2EE-based applications directly to VersantenJin to gain the inherent productivity and performance advantages of theunderlying Versant object database.

 

•                  Integrationwith Users’ Existing Information Systems. Versant products operate on a wide range of server platforms: includingUNIX platforms from Sun Microsystems, Hewlett-Packard, IBM, Compaq and SiliconGraphics; Linux platforms from Red Hat; and Microsoft Windows and NT platforms.In addition, Versant-based applications can interoperate with informationstored in relational database management, enabling these applications tocomplement the strengths of relational database management systems  structured applications.

 

To assist users indeveloping and deploying applications based on VDS and Versant enJin, we offera variety of services, including consulting, training and technical supportservices.  We also offer a dedicatedconsulting practice for IBM WebSphere customers.  Under an agreement signed in late 2000, we allocate certain ofour consultants to IBM and both IBM and Versant sales representatives sellthese consultants’ services.

 

**Fiscal2002 Developments and Strategy**

 

During fiscal 2002, we continued to focus our effortson seeking revenue from VDS and Versant enJin, as well as from growth of ourconsulting programs.  In November 2002,shortly after the close of our fiscal year, we also announced our new real-timebusiness strategy.  This strategy, whichis discussed below, was initiated by our acquisition of Mokume Software, aprivately held company focused on the development of real-time softwareproducts that enable companies to more rapidly access quickly changinginformation derived from their operations and make key business decisions basedon that updated information.

 

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In fiscal 2002, Versant’score offerings, VDS and enJin, continued to be the primary drivers of ourproduct sales and marketing efforts and we concentrated our businessdevelopment efforts on VDS and enJin to develop and manage strategic alliancesand consulting partners.

 

VDS has traditionally been used on client-serversystems.  Over time, Information Systems(IS) architectures have evolved to support the development of new e-businessapplications through the deployment of Java 2 Enterprise Edition (J2EE)application servers.  J2EE applicationservers, provided by vendors such as BEA WebLogic and IBM WebSphere, provide a“middle-tier” solution for managing distributed e-business applications overthe Internet, while allowing enterprises to maintain and leverage theirline-of-business databases on the “back-end.” VDS excels at managing complexdata such as graphical, navigational or hierarchical data.  However, applications that utilize thesetypes of data are not directly supported in J2EE and typically require complexmanual coding before they can be deployed. Versant enJin solves this problemand enables the advanced data management capabilities of VDS to be extended toJ2EE applications by providing powerful enhancement for J2EE applicationservers that enable them to store and access graphical, navigational andhierarchical data.  By adding powerfulsupport for these data types, enJin dramatically expands workload capacity andincreases performance for the application server environment through use of itscaching algorithm.  *We believe thatVersant enJin can play a significant role in building a class of successfule-business applications for use on the Internet that will enable us to provideVDS’ functionality to new Internet-based applications for additional customers.

 

To accomplish our goalsof increasing sales of VDS and extending our sales to the application servermarket through Versant enJin, in fiscal 2002 we continued research anddevelopment efforts with respect to these products.  However, due to the current adverse business environment we didthis at a slower pace and with selective cuts in our research and developmentpersonnel.  2002 VDS and enJin productenhancements included increased scalability and reliability and a new softwarekey system that will enable closer control of licensed software.  Versant enJin product enhancements releasedin 2002 included distributed transaction integrity, increased use of emergingJ2EE standards, the new above-mentioned software key system and newintegrations for leading J2EE-based Integrated Development Environment (IDE)products, such as Borland’s JBuilder and IBM’s WebSphere Studio ApplicationDeveloper. *As familiarity with object-oriented technology and awareness of ourproducts increase, we believe that we will be able to increase our use ofindirect sales channels to address a broader market and to capitalize onresellers’ integration capabilities.

 

In fiscal 2002, wederived significant revenue from our services programs.  With respect to our consulting business, in2002 we increased the number of personnel in our Versant professional servicesorganization and in our IBM WebSphere Consulting Practice.  Our IBM WebSphere consulting business grewsubstantially each quarter of 2002 over the previous year.  Our services programs, including theWebSphere program, are intended to produce incremental revenue, particularlyfrom sales of Versant enJin, as well as to serve as an additional channel forgenerating new product revenue.  *Webelieve that our services program will ultimately help us generate additionalservice and product revenues.

 

In 2002, thetelecommunications industry continued to be a very significant vertical marketsegment for us.  Our products are usedin the telecommunications industry in such strategic, distributed applicationsas network modeling and management, fault diagnosis, fraud prevention, serviceactivation and assurance, and customer billing.  We have also attained customer acceptance in other verticalmarkets, including defense, financial services, transportation and health care.** **Versant enJin is also a horizontalsolution, well suited to a number of vertical industries in addition totelecommunications and defense.  Forexample, Versant enJin can be used by vendors building portals ande-marketplaces, and other Internet-based services providers.  *In the future, we intend to continue tobuild on our current customer base as we believe that the telecommunications andfinancial services industries will continue be major users of applicationservers. *We also expect government and the defense industry market tocontribute significantly as many of the applications in development in thatsector reach deployment stage.

 

**Real-TimeBusiness Strategy**

 

In November 2002 we announced our new real-timebusiness strategy. The first step taken in this initiative was our acquisition,on November 19, 2002, of Mokume Software, a privately held company focused onthe development of

 

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real-time software products. *We expect our new real-time business tobecome a key element of our plans to expand our customer base beyond thosecompanies that have traditionally been purchasers of our object technologyproducts.

 

*Our real-time business will focus on the developmentand marketing of data management products capable of accessing and analyzingbusiness operations data in real time. *Fast access to real-time data will enable businesses to rapidly usethis “up to date” information to make better-informed business decisions and toquickly adjust their  practices inresponse to constantly changing business conditions.  *We believe that real-time technology will allow businessdecision makers to react to changes in their businesses dramatically faster,and enable them to better optimize management of their operations morecost-effectively

 

*We intend to initially focus our real-time businesson the development and marketing of applications designed for the manufacturingindustry, particularly process-based manufacturers.  Mokume possesses technology and experience in sourcing data frommanufacturing systems so that it can be used in an enterprise’s data infrastructure.*We expect to leverage the advantages that our core object technology productsdeliver in the real-time business by combining them with Mokume’s real-timetechnology and expertise in obtaining, analyzing and synthesizing manufacturingdata from physical devices such as sensors, plant-floors, card readers,logistics trackers and others. *We plan to integrate VDS into our real-timeofferings because of its ability to process and store very large amounts ofreal-time data streams.  For example,VDS has been effectively used to store high volume streams for data emanatingfrom telco switches, routers, reservation systems and satellite feeds.*Mokume’s products and technology will enable Versant to obtain and processdata through VDS from a new range of manufacturing devices.  *Our plans for the real-time businessinclude enhancing the products that came to Versant through our acquisition ofMokume as well as releasing new products based on combinations of Mokume’stechnology with Versant’s object technology.

 

*In the future we expect to develop and marketreal-time products that will be targeted at other vertical industries andmarkets beyond the manufacturing industry.  *We also expect to expand our distribution channels by partnering withglobal providers for our real-time business.  To fully exploit this opportunity, we have created a new business unitfully focused on real-time business and have created a telesales and businessdevelopment team dedicated to our real-time business.

 

**Products and Services**

 

Versant Developer Suite (VDS)

 

VDS, a sixth generationobject database management system, is designed to support multi-user,commercial applications in distributed environments.  The object-oriented, balanced client-server architecture of VDSprovides the basis for high-performance, scalable distributedapplications.  We believe that VDSoffers performance superior to that of relational database management systems,particularly for complex data applications, for which VDS has the capability ofprocessing a wide variety of abstract data types in a highly concurrent, highperformance manner.  VDS is designed tointegrate up to 65,000 databases connected over a like number of locations on avariety of hardware and software platforms. Each database has a theoretical storage capacity of 4.6 millionterabytes, an amount far beyond the actual capacity of most existing operatingsystems.  VDS implements a variety ofdatabase features, including a two-phase commitment for distributed transactionintegrity and database triggers to monitor changing events and data and tonotify users and applications when specified events occur.  In addition, on-line management utilitiesenable routine maintenance to be performed while the database is running.  These include utilities to perform backupoperations, manage log files, dynamically evolve database schema, add, deleteand compress volumes on disk storage and related functions.  These utilities provide multiple levels ofadministrative access and application security.  We also believe that use of VDS allows our customers to bothreduce the time needed to develop applications for their data managementsystems and to improve system performance. With version 6.0 of VDS, we bundle several components, including thecore object database management system, C++ and Java language interfaces, XMLfor import and export of data into the database and asynchronous replicationservices to provide updates among distributed Versant databases.  We believe that by bundling these componentsin addition to enhancing them, we have made it easier for our customers todeploy them.

 

Versant enJin

 

Versant enJin enables users to deploy Java-based applications using Java 2 Enterprise Edition, or J2EE, technologies,such as Enterprise Java Beans, in applications requiring storage and access ofcomplex graphical, navigational, and

 

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hierarchical data models to speed the performance and enhance thescalability of these applications. The use of such complex object models isdesirable but not directly supported in J2EE. Versant enJin addresses this problem by providing transparentpersistence for Java objects within the application server and web servertiers, enabling J2EE-based applications to enjoy the benefits of these objectmodels. Versant enJin is comprised of VDS plus the J2EE integration specific tothe application server platform.  Versant enJin supports the IBM WebSphere and BEA WebLogic applicationservers. Versant enJin is designed to accelerate e-business applications withinthe application server environment, simplify development of new Java ore-business applications and provide reliability for the management of objectswithin the application server environment. 

 

Versant SQL Suite

 

VDS and Versant enJin allow users a choice of accessmethods for querying and manipulating data in the Versant object databasemanagement system and obtaining data from relational databases.  With the Versant SQL Suite, we offer opendatabase connectivity capability and structured query language access to datastored in relational databases using industry-standard off-the-shelf query andreporting tools.  These tools permitcustomers to retain their investments in legacy systems while addressing newapplications with the productivity, flexibility and performance characteristicsmade available through object technology.

 

Versant Fault Tolerant Server

 

For highly reliable operation in mission criticalenvironments, we offer the Versant Fault Tolerant Server.  This product ensures transparent failurerecovery by connecting database clients to synchronized copies of the databasestored on physically separate computers. If one of the databases fails due to operating system failure, hardwarebreakdown or other interruption, the other database continues operation withoutapplication interruption.  When thefailed database is restored, the two databases automatically resynchronize andresume operations without application interruption

 

High Availability Backup Solution

 

The High AvailabilityBackup Solution enables VDS and Versant enJin to use the mirroring and backupfeatures of EMC Symmetrix or other enterprise storage systems to take an onlinebackup of very large data volumes within seconds, without impacting transactionresponse times.

 

***Licensing and Pricing of Products***

 

We license our products to end-users both directly,through our own sales force, and indirectly through authorized value-addedresellers, systems integrators and distributors.

 

When we license our products directly to end-users, wedo so primarily through two types of perpetual licenses—development licensesand deployment licenses.  Developmentlicenses are typically sold on a per seat basis and authorize a customer todevelop an application program that uses VDS or Versant enJin.  Before a customer may deploy an applicationit has developed under our development license, we require it to purchasedeployment licenses from us based on the number of computers connected to theserver that will run the application using our database management system.  If the customer wishes to install severalcopies of an application it has created under a development license, thenseparate deployment licenses are required for each server computer and eachclient computer that will run that application.  For certain applications, we offer deployment licenses priced ona per user basis.  Pricing of VDS andVersant enJin licenses varies according to several factors, including thenumber of computer servers on which the application will run and the number ofusers that will be able to access the server at any one time.  Customers may elect to simultaneouslypurchase development and deployment licenses for an entire project.

 

End-user license fees for our development anddeployment licenses can range from the low thousands of dollars to severalmillion dollars depending on a number of variables.  These variables include, but are not limited to, the following:the number of users (specific number or unlimited), the number of deployments,the time frame of deployments, whether the deployments are to be prepaid orpaid on an as needed basis, the type of operating system(s), the type ofserver(s) and whether the servers are single or multiprocessor machines.  We provide alternative pricing for

 

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non-interactive environments where the product (such as a telephoneswitch) is deeply embedded in a component and is not used by end-users.

 

We also provide our products to end-users throughauthorized value-added resellers, systems integrators and distributors.  Value-added resellers generally purchasedevelopment licenses from us on a per seat basis on terms similar to the termsof development licenses we sell directly to end-users, although the price mayvary.  Under this license a typicalvalue-added reseller develops an application incorporating VDS or Versant enJinand then licenses that application to a customer.  Value-added resellers are authorized by us to sub-licensedeployment copies of VDS or Versant enJin to end-users, bundled together withthe value-added resellers’ applications. Deployment license pricing for sales through value-added resellers isgenerally based either on a percentage of the total price charged by thevalue-added reseller to the end-user customers or on a percentage of our listprices. Systems integrators generally purchase licenses from us that entitlesthem to sublicense our software products to their customers for use in systemsdesigned or built by the systems integrator. Deployment license pricing for salesto systems integrators are generally the same as value added resellers.   We also sell our products to distributorswho are authorized to sublicense and resell them to end-users.  Sales to distributors generally includesignificant discounts off our typical end-user license fees.

 

***Services***

 

We offer customers training, consulting andmaintenance and technical support services.

 

We provide a variety of training and consultingservices to assist customers in the design, development, education and managementof VDS, Versant enJin and IBM’s WebSphere application server.  Training services are offered for a varietyof Versant-specific and object-related technologies and range from beginning toadvanced levels.  Consulting servicesare available for analysis and design assistance, mentoring and technicaltransfer, application coding, design reviews and performance analysis.  In addition, we provide custom developmentservices to customers that request unique or proprietary productextensions.  Depending on the nature andcomplexity of the custom development services requested, these services may beperformed by our consulting employees or by third-party integrators that havejoined our IGNITE! Partner Program and received training.

 

Our maintenance and technical support services aregenerally available at an annual fee that varies depending on the type ofsupport the customer requires. Maintenance and support contracts, which typically have twelve-monthterms, are offered concurrently with the initial license of our product andentitle the customer to telephone support and to product and documentationupdates.  For additional fees, customersmay purchase a special support package that provides a designated supportengineer, and may obtain telephone support available 24 hours per day.  Maintenance contracts are typicallyrenewable annually.

 

**Customersand Applications**

 

VDS and Versant enJin are licensed for developmentand/or deployment in a wide range of applications.  A substantial amount of our sales are for applications in thetelecommunications, financial services, healthcare and defense sectors.  Many of our customers have licensed multiplecopies for use in different applications.

 

In recent years we have experienced concentration ofour sales to certain customers.  Infiscal 2002, IBM represented 14% of our total revenue.  Two customers accounted for 28% and 11% ofour total 2001 revenue in the ten months ended October 31, 2001, whereas in theyear ended December 31, 2000, no single customer accounted for 10% or more ofour total revenue.

 

*Our future performance will depend in significantpart on the continued growth of the use of VDS and Versant enJin intelecommunications, defense, and financial market applications and theacceptance of our products within the telecommunications and financial servicesindustries.  *Although we anticipatethat our new real-time business will eventually increase our ability to marketour products to an increased number of industries, there can be no assurancethat our real-time initiative will succeed in enlarging our customer base.  Consequently, the failure of our products toperform favorably in and become an accepted component of telecommunications,defense, Internet-based or financial services applications, or in new real-timeapplications, or a slower than expected increase or a decrease in the volume of

 

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sales of our products and services to telecommunications, defense,Internet-based or financial services companies or to markets targeted by ournew real-time business, could have a material adverse effect on our business.

 

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**Salesand Marketing**

 

We market and sell our products in the United Statesprincipally through our direct sales force and value-added resellers andsystems integrators.  Internationally wemarket and sell through our direct sales force, value-added resellers anddistributors.

 

*DirectSales. O*ur direct sales organization is based at ourcorporate headquarters in Fremont, California and at our other regional officesaround the world.  The direct salesorganization includes our field sales personnel, who are responsible foraccount management, and systems engineers, who answer technical questions andassist customers in running benchmarks against competitive products anddeveloping prototype applications.

 

*IndirectSales.*  *Animportant part of our future sales strategy will be the continued developmentof indirect distribution channels, such as value-added resellers, systemsintegrators and foreign distributors. We expect to increase our focus on indirect sales channels as we addressthe e-business market.  Our existingreal-time product is currently marketed globally by our commercial salespartners. Typical value-added resellers build application programs in whichthey embed a deployment copy of VDS or Versant enJin.  Systems integrators may include our products with those of othersto provide a complete solution to their customers.  Value-added resellers and systems integrators are typically notsubject to any minimum purchase or resale requirements and can cease marketingour products at any time.  Certainvalue-added resellers, distributors and systems integrators offer competitiveproducts that they produce or that are produced by third parties.

 

*Marketing. *Our marketing programs andpersonnel are aimed at external and internal audiences with the goal ofbuilding visibility and generating leads for Versant’s core business and thenew real-time business unit.  *One ofour current key marketing initiatives is to build customer awareness and marketleadership for Versant in the real-time business space. Our marketing programsinclude our efforts at cultivating media and analyst relations, fosteringvaluable investor communications, a speakers’ program, online marketing,partner marketing programs and participation in conferences and tradeshows.

 

*SalesProcess*.  The salescycle for our core VDS and enJin products to new, large enterprise customerscan exceed six months and may extend to a year or more.  For existing customers with successfullydeployed applications, sales cycles for new applications of our product suitesare generally much shorter.  Thereal-time products that we have recently begun to distribute through ourchannel partners exhibit generally shorter sales cycles as well as reducedsales investments. During the sales cycle, meetings involving both technicaland management staff are conducted frequently at the prospective customer’ssite and at our headquarters.  As partof their product selection process, our prospective customers typically performa detailed technical evaluation or benchmark of our object-based technologies,often directly comparing them to competitive products.  Upon completion of the evaluation, acustomer may purchase one or more development licenses depending upon thenumber of programmers that will develop and build the customer’sapplication.  Additionally, a customermay purchase technical support, training courses and consulting services.  Our customers may purchase deploymentlicenses at the same time as they purchase development licenses, or defer theirpurchase of deployment licenses and related maintenance until they complete theapplication development (a process that typically takes at least six months andcan exceed one year).

 

Once an application is ready for deployment, acustomer typically will purchase deployment licenses that are priced based uponthe number of users, in the case of an end-user, or as a percentage of thecustomer’s revenue that is generated for the sale of its application, in thecase of value-added resellers and distributors.  Customers may purchase additional deployment licenses as needed,without further deliveries from us, providing additional higher-margin revenueover an extended period at a relatively low incremental cost to us.  The amount and price of deployment licensesgenerally exceed the amount and price of earlier development licenses.

 

*Shippingand Backlog***. **Allsoftware is delivered from our Fremont facility and is delivered to thecustomer upon receipt of an approved order and a signed license agreement.  We typically do not have a material backlogof unfilled license orders at any given time, and we do not consider backlog tobe a meaningful indicator of our future performance.

 

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*InternationalSales and Marketing*. Our foreign sales are recorded by subsidiaries located in Germany andthe United Kingdom who also sell our products through distributors, value addedresellers and end-users.  Our revenuesfrom international sales were $6.4 million in the year ended October 31, 2002,$6.5 million in the ten months ended October 31, 2001 and  $11.2 million in the year ended December 31,2000.

 

**Researchand Development**

 

* We have committed, and expect to continue to commit,substantial resources to our research and development efforts.  Our current development efforts are focusedon:

 

•                  ongoing effortsto improve the  performance and scalabilityof VDS and Versant enJin;

•                  expanding thefeatures and range of products for our new real-time business;

•                  supporting J2EEtechnologies and continuing to leverage Java for e-business applications;

•                  improving theintegration of our products with leading application servers, IDE vendors’products and middleware technologies;

•                  providingsupport and/or integration with existing and emerging computing standards.

 

Our research anddevelopment expenses were approximately $5.8 million in the year ended October31, 2002, $5.5 million in the ten months ended October 31, 2001 and $5.9million in the year ended December 31, 2000. To date, all research anddevelopment expenditures have been expensed as incurred.

 

VDS and Versant enJin, todate, have been almost entirely developed by our own research and developmentpersonnel.  We selectively supplementour internal staff with outside consultants having expertise in specificareas.  Our research and developmentteam consists mainly of software engineers with significant experience andexpertise in such technologies as:

 

•                       object-oriented softwaredevelopment, including Java;

•                       relational database technology;

•                       platform engineering;

•                       design and integration;

•                       large-scale run-timeenvironments; and

•                       middleware technologies.

 

We perform some of ourporting and enhancement engineering work in our office in India. Versant India,a wholly owned subsidiary, had 36 employees as of October 31, 2002 and occupiesa rented facility of approximately 6,500 square feet in Pune, India.

 

* We believe that our future results will depend onour ability to improve our current technologies and to develop new products andproduct enhancements on a timely basis. The market for our products and services is characterized by changingcustomer demands, rapid technological change and frequent introductions of newproducts and product enhancements. Customer requirements for products can change rapidly as a result ofinnovations or changes within the computer hardware and software industries, theintroduction of new products and technologies (including new hardware platformsand programming languages) and the emergence, evolution or widespread adoptionof industry standards.  The actual oranticipated introduction of new products, technologies and industry standardscan render existing products obsolete or unmarketable or result in delays inthe purchase of these products.  As aresult, the life cycles of our products are difficult to estimate.  We have in the past experienced delays inthe introduction of new products and features, and may experience similardelays in the future.  If we are unable,for technological or other reasons, to develop new products or enhancements ofexisting products in a timely manner in response to changing market conditionsor customer requirements, our business, operating results and financialcondition will be materially adversely affected.

 

**IntellectualProperty and Other Proprietary Rights**

 

We rely primarily on a combination of copyright andtrademark laws, trade secrets, confidentiality procedures and contractualprovisions to protect our proprietary technology.  For example, we license our software pursuant to signed

 

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license agreements and, to a lesser extent, “shrink-wrap” licensesdisplayed in evaluation download and software installation screens, whichimpose certain restrictions on the licensee’s ability to utilize oursoftware.  In addition, we seek to avoiddisclosure of our trade secrets, such as by requiring those persons with accessto our proprietary information to execute non-disclosure agreements with us,and we restrict access to our software source code.  We seek to protect our software, documentation and other writtenmaterials under trade secret and copyright laws, which afford only limitedprotection. We were also awarded a United States patent (No. 5,822,759) for ourproprietary cache system used within our product suites, which expires in 2015.

 

**Competition**

 

For our VDS product, we compete with companiesoffering object and relational database management systems, many of whom arelarge and well-established corporations with broader product lines. In thee-business market our competitors consist of both relational databasemanagement companies, many of whom have modified or are expected to modifytheir systems to incorporate object-oriented interfaces and other functionalitymore directly competitive with our object-oriented technologies, as well asfrom companies with substantial experience in object-oriented software thatprovide components similar to those included in Versant enJin. In order for ourproducts to be well accepted in the e-business market, it is important for oneor more of our technical partnerships with application server vendors such asIBM and BEA to become deeper and more extensive.

 

Many of our competitors, especially Oracle andComputer Associates, have longer operating histories, significantly greaterfinancial, technical, marketing, service and other resources, significantlygreater name recognition, broader product offerings and a larger installed baseof customers.   In addition, many of ourcompetitors have well-established relationships with our current and potentialcustomers of ours.  We may not be ableto compete successfully against current or future competitors, and competitivepressures could have a material adverse effect on our business, pricing,operating results and financial condition.

 

For a more detaileddiscussion of the competition we face in our business, see Item 7. —“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Risk Factors—Risks Related to Our Industry—We face competition forboth our VDS and Versant enJin products.”

 

**Employees**

 

As of October 31, 2002, we and our subsidiaries, had atotal of 128 employees, of whom 75 were based in the United States, 17 inEurope, and 36 in India. ** **Ofthe total, 60 employees were engaged in engineering and technical services, 28were engaged in sales and marketing, 25 were engaged in the servicesorganization and 15 were engaged in administration and finance.  In November of 2002, in addition to theacquisition of Mokume, we reorganized our workforce.  After the acquisition and reorganization and as of December 4,2002 we had 127 employees.  None of ouremployees is represented by a labor union with respect to his or her employmentby us.  We have experienced no organizedwork stoppage to date and believe that our relationship with our employees isgood.

 

*Our future performancedepends in significant part upon the continued service of our key technical,sales and senior management personnel. The loss of the services of one or more of our key employees could havea material adverse effect on our business, operating results and financialcondition.

 

**Item2.  Properties.**

 

Our principal administrative, sales, marketing andresearch and development operations are located in Fremont, California, in abuilding with approximately 54,000 square feet under a lease expiring in May2007.  We also have a sales office inTexas. *We believe that our current facilities will be adequate for our requirements for the next severalyears.   Our subsidiaries also leasespace, generally under multi-year operating lease agreements, in Pune, India;Munich, Germany; and Hampshire, England.

 

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**Item 3.  Legal Proceedings.**

 

We and certain of our presentand former officers and directors were named as defendants in four class actionlawsuits filed in the United States District Court for the Northern District ofCalifornia on January 26, 1998, February 5, 1998, March 11, 1998 and March 18,1998. On June 19, 1998, a Consolidated Amended Complaint was filed by thecourt-appointed lead Plaintiff.  Afterthe court dismissed two amended complaints, plaintiffs filed a Third AmendedComplaint on May 10, 2001 that alleged violations of Sections 10(b) and 20(a)of the Securities Exchange Act, and Securities and Exchange Commission Rule10b-5 promulgated under the Securities Exchange Act, in connection with publicstatements about Versant and its financial performance. On December 4, 2001,the court dismissed the Third Amended Complaint with prejudice due toPlaintiff’s failure to state a claim of their securities fraud action. OnDecember 13, 2001, plaintiffs filed a notice of appeal to the Ninth CircuitCourt of Appeals. On May 2, 2002, the plaintiffs, now as appellants, filed anopening brief alleging the dismissal was in error and should be reversed. Wefiled our answering brief on July 12, 2002, and the appellants filed theirreply brief on August 9, 2002.  Oralarguments were heard on January 14, 2003 and on January 23, 2003 the Court of Appeals affirmed the District Court’sdismissal.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

 

No matters were submitted to a vote of security holders during ourfourth fiscal quarter of our fiscal year ended October 31, 2002.

 

**Item4A.  Executive Officers of theRegistrant.**

 

Set forth below is information regarding our executive officers as ofJanuary 27, 2003:

 
| **Name of Executive Officer** |   | **Age** |   | **Position  with the Company**                                                     |
|-------------------------------|--------|---------|--------|------------------------------------------------------------------------------------|
|                          |   |    |   |                                                                               |
| Nick Ordon                    |   | 55      |   | President and  Chief Executive Officer                                             |
|                          |   |    |   |                                                                               |
| Lee McGrath                   |   | 41      |   | Vice President,  Finance and Administration, Chief Financial Officer and Secretary |
|                          |   |    |   |                                                                               |
| Ajay Jain                     |   | 35      |   | President,  Real-Time Solutions                                                    |
|                          |   |    |   |                                                                               |
| Tom Miura                     |   | 43      |   | Executive Vice  President and Chief Operating Officer                              |

 

**Nick Ordon** has served as President, ChiefExecutive Officer and a director of Versant since he joined the company inJanuary 1998.  From July 1996to December 1997, Mr. Ordon was Vice President and General Manager ofMessaging at Lotus Development Corporation, a software development company andwholly-owned subsidiary of International Business Machines Corporation.  From August 1994 to July 1996, hewas Vice President and General Manager of the Commercial Business Unit ofLockheed Martin Corporation, an aerospace products company. FromJanuary 1993 to August 1994, Mr. Ordon served as General Manager,NetWare Operations with Hewlett-Packard Company. Mr. Ordon received both aBachelor and Masters of Science degree in Aerospace Engineering from theUniversity of Colorado in 1970 and 1971, respectively, and a Masters ofBusiness Administration degree in Finance and Operations from SyracuseUniversity in 1980.

 

**Lee McGrath** has served as Versant’s VicePresident, Finance and Administration, Chief Financial Officer and Secretarysince joining the Company in July 2000. From June 1999 to July 2000, he served as Director of Financial Planningand Analysis, Flat Panel Systems, for Philips Components, a division of PhilipsElectronics.  From June 1997 to May1999, Mr. McGrath served as Controller for Digital Link Corporation, anetworking equipment company.  FromDecember 1988 to June 1997, he was with Measurex, a manufacturer of electroniccontrol systems, where he served in a variety of financial management andcontroller positions, in both the company’s U.S. and overseas offices.  Mr. McGrath is a Chartered CertifiedAccountant and received a Masters of Business Administration degree fromPepperdine University in 1997.

 

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**Tom Miura** has served as the Company’s Chief Operating Officer sinceJuly 2001.  Between November 2000 and July2001, he served as the Companys Senior Vice President, Operations. EffectiveJanuary 31, 2003 Mr. Miura will terminate his employment with Versant, althoughhe will continue to provide certain consulting services to Versant for certainperiods of 2003. Between March 2000 and November 2000, Mr. Miura was theCompany’s Vice President of Business Development and Services.  From 1981 until March 2000, Mr. Miura held avariety of management positions with the Software Group of InternationalBusiness Machines Corporation, including World-Wide Sales Executive forApplication Development Tools and WebSphere between June 1996 and March 2000and Manager of Services Development, Product Marketing and Technical Marketingfor Application Development Tools between October 1994 and June 1996. Mr. Miurareceived a Bachelor of Arts degree in Business Administration from CaliforniaState Polytechnic University, Pomona in 1980.

 

**AjayJain**has served as the Company's President, Real TimeSolutions, a newly created business unit since November 2002.  Between December 2000 and November 2002, Mr.Jain was President and Chief Executive Officer of Mokume Software, Inc., adeveloper of planning and process management software for the manufacturingindustry, which he co-founded and which was acquired by the Company in November2002.  Between August 1999 and November2000, Mr. Jain was President and Chief Executive Officer of Qdecor Software, a3D software company for home decor products, which was acquired by Design Labsin 2000.  Between August 1997 and August1999 Mr. Jain was Director, Worldwide Information Technology & Applicationsat Clarify Corporation, a public company, and developer of customerrelationship management software which was acquired by Nortel Networks in 1999.  From 1995 to 1997, Mr. Jain served as Sr.Manager of Database Architecture Group at Netscape Communications.  Prior to 1995, Mr. Jain worked in severalengineering roles for over 6 years at Quantum Corporation and Cadence DesignSystems.  Mr. Jain holds a Mastersdegree in Business Administration from Santa Clara University, a Masters ofScience degree in Computer and Information Science from Clarkson University anda Bachelors of Science degree in Mathematics and Economics from DelhiUniversity, India.

 

There is no familyrelationship between any of the foregoing executive officers or between any ofsuch executive officers and any of the members of our Board of Directors. Ourexecutive officers serve at the discretion of the Board.

 

**PART II**

 

**Item5.  Market for Registrant’s CommonEquity and Related Stockholder Matters.**

 

**PriceRange of Common Stock**

 

Our common stock is quoted on the Nasdaq Small CapMarket  under the symbol “VSNT.”  Our common stock commenced trading on theNasdaq National Market on July 18, 1996. From July 19, 1999 until March 7, 2000 our common stock was traded onthe Nasdaq SmallCap Market.  From March8, 2000 to September 30, 2002, our common stock was traded on the NasdaqNational Market.   Since October 1, 2002our common stock has been quoted on the Nasdaq SmallCap Market.  We requested that listing of our commonstock be transferred to the Nasdaq Smallcap Market as of October 1, 2002 due tothe fact that it then seemed unlikely that, in the near term, we would continueto be able to satisfy the listing criteria of the Nasdaq National MarketSystem.  The following table lists thehigh and low intra-day prices of our common stock reported by Nasdaq during thelast two fiscal years.

 

| **Year  Ended December 31, 2000**      |   | **High** |   | **Low** |   |
|----------------------------------------|--------|----------|--------|---------|--------|
|                                   |   |     |   |    |   |
| First Quarter                          |   | 18.56    |   | 7.53    |   |
| Second Quarter                         |   | 12.31    |   | 4.00    |   |
| Third Quarter                          |   | 7.00     |   | 3.77    |   |
| Fourth Quarter                         |   | 5.94     |   | 1.81    |   |
|                                   |   |     |   |    |   |
| **Ten  Months Ended October 31, 2001** |   |     |   |    |   |
|                                   |   |     |   |    |   |
| First Quarter                          |   | 4.22     |   | 1.50    |   |
| Second Quarter                         |   | 2.20     |   | 1.00    |   |
| Third Quarter                          |   | 3.37     |   | 1.18    |   |
| Fourth Quarter (through 10/31/01)      |   | 3.42     |   | 1.90    |   |
|                                   |   |     |   |    |   |
| **Year  Ended October 31, 2002**       |   |     |   |    |   |
|                                   |   |     |   |    |   |
| First Quarter                          |   | 4.74     |   | 2.35    |   |
| Second Quarter                         |   | 2.59     |   | 1.20    |   |
| Third Quarter                          |   | 1.45     |   | 0.45    |   |
| Fourth Quarter                         |   | 0.72     |   | 0.28    |   |

 

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**Shareholders**

 

There were approximately 110 holders of record of ourcommon stock as of January 21, 2003.  Webelieve that a significant number of beneficial owners of our common stock holdtheir shares in street name.  Based oninformation available to us, we believe we have at least 400 beneficialshareholders of our common stock.

 

**DividendPolicy**

 

We have neither declared nor paid cash dividends onour common stock in the past.  *Weintend to retain future earnings, if any, to fund development and growth of ourbusiness and, therefore, do not anticipate that we will declare or pay cashdividends on our common stock in the foreseeable future.

 

Information required by this Item regarding our equity compensationplans appears in Part III, Item 12 of this Report, under the heading“Securities Authorized for Issuance Under Equity Compensation Plans.”

 

**Item6.  Selected Financial Data**

 

The following selected consolidated financial data has been derivedfrom our audited consolidated financial statements.  The information set forth below is not necessarily indicative ofresults of our future operations, and should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and the consolidated financial statements and notes in this Form10-K in order to fully understand factors that may affect the comparability ofthe information presented below and factors that might cause the followingselected financial data not to be indicative of our future financial conditionand results of operation.   Inparticular, it should be noted that because we changed our fiscal year end fromDecember 31 to October 31 in 2001, our transition period in 2001 was only a10-month period, which impacts the comparability of the following financialdata.

 
|                                             |   | **Year  Ended  October 31,**              |   | **Ten Months  Ended****October 31,** |   | **Years Ended December 31,**  |   |
|--------------------------------------------------|--------|-------------------------------------------|--------|--------------------------------------|--------|-------------------------------|--------|
|                                             |   | **2002**                                  |   | **2001**                             |   | **2000**                      |   | **1999** |   | **1998** |   |
|                                             |   | **(in thousands, except per share dat**a) |   |
| **Consolidated Statements of  Operations Data:** |   |                                      |   |                                 |   |                          |   |   |   |   |   |
| Total revenue                                    |   | $                                         | 19,956 |                                 | $      | 23,909                        |   | $ | 28,445 |   | $ | 25,868 |   | $ | 23,233 |   |
| Income (loss) from operations                    |   | (3,609                                    | )      | (7,012                               | )      | 2,152                         |   | (409 | ) | (19,225 | ) |
| Net income (loss)                                |   | (3,390                                    | )      | (7,158                               | )      | 1,856                         |   | (1,736 | ) | (19,935 | ) |
| Net income (loss) per share:                     |   |                                      |   |                                 |   |                          |   |   |   |   |   |
| Basic                                            |   | $                                         | (0.28  | )                                    | $      | (0.59                         | )      | $ | 0.16 |   | $ | (0.17 | ) | $ | (2.16 | ) |
| Diluted                                          |   | $                                         | (0.28  | )                                    | $      | (0.59                         | )      | $ | 0.12 |   | $ | (0.17 | ) | $ | (2.16 | ) |
|                                             |   |                                      |   |                                 |   |                          |   |   |   |   |   |
|                                             |   | **Year  Ended  October 31,**              |   | **Ten Months  Ended****October 31,** |   | **Years  Ended December 31,** |   |
|                                             |   | **2002**                                  |   | **2001**                             |   | **2000**                      |   | **1999** |   | **1998** |   |
|                                             |   | **(in thousands)**                        |   |
| **Consolidated Balance Sheet Data:**             |   |                                      |   |                                 |   |                          |   |   |   |   |   |
| Total assets                                     |   | $                                         | 11,921 |                                 | $      | 15,370                        |   | $ | 22,502 |   | $ | 19,241 |   | $ | 20,669 |   |
| Working capital                                  |   | 2,326                                     |   | 3,664                                |   | 7,863                         |   | 1,584 |   | (3,303 | ) |
| Long-term debt                                   |   | —                                    |   | 3                                    |   | 40                            |   | 127 |   | 4,047 |   |

 

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**Item7.    Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

*As indicated in the paragraph above Item 1 in this report,this Form 10-K (including this Item 7) contains certain forward-lookingstatements within the meaning of the Securities Exchange Act and the SecuritiesAct.  In many cases you may identifythese forward-looking statements by words such as “will,” “should,” “may,”“might,” “believes,” “anticipates,” “expects,” “intends,” “estimates” and similarexpressions.  In other (but not all)cases we have identified sentences containing forward-looking statements bypreceding the sentence with an asterisk; These forward-looking statementsinclude, among other things, projections of our future financial performanceand trends anticipated for our business. We caution investors that forward-looking statements are onlypredictions or estimates based upon our current expectations about futureevents.  The forward-looking statementsare not guarantees of future performance and are subject to significant risksand uncertainties that are difficult to predict.  Our actual results and performance may differ materially from theresults and performance anticipated by any forward-looking statements due tothese risks and uncertainties, some of which are discussed below in this Item 7under the heading  “Risk Factors.”Readers are urged to carefully review and consider the various disclosures madeby us in this report and in our other reports filed with the Securities andExchange Commission that attempt to advise interested parties of the risks andfactors that may affect our business.*

 

**Overview**

 

We were incorporated in August 1988. Our principal products are the Versant Developer Suite, or VDS, a sixthgeneration object database management system, and Versant enJin, a databasemanagement product suite for e-business that accelerates transactions forapplication servers.  We commencedcommercial shipment of VDS in 1991 and commercially released Versant enJin in2000.  We license VDS, Versant enJin andperipheral products, and sell associated maintenance support and training andconsulting services to end-users through our direct sales force and throughvalue-added resellers, systems integrators and distributors.  Substantially all of our revenue has beenderived from:

 

(1) sales of licenses forVDS and Versant enJin;

(2) related maintenanceand support, training and consulting services

(3)    nonrecurring engineering feesreceived in connection with providing services associated with VDS and VersantenJin;

(4) sales of peripheralproducts for VDS and Versant enJin; and

(5) the resale oflicenses, maintenance, training and consulting for third-party products thatcomplement VDS and Versant enJin.

 

Throughout 2002, we continued to focus on three majorsales and product development initiatives: enhancement of and revenue growthfor VDS; enhancement of and revenue growth for Versant enJin; and growth in ourconsulting programs.  Shortly after theend of our fiscal year ended October 31, 2002, we also announced our intentionto pursue a new real-time business initiative, which we commenced with ourNovember 2002 acquisition of Mokume Software.

 

*We expect that licenses of VDS, Versant enJin,related products, new products we develop in our real-time business andthird-party products and sales of associated services will be our principalsources of revenue for the foreseeable future. *While it will continue to be important for us to derive revenue fromcustomers we have historically served in the telecommunications and financialservices industries, we believe that our future performance will depend to asignificant degree on both the continued growth of the e-business market andour ability to successfully pursue the market we believe exists for real-timecomputing products.  *Success in thee-business marketplace and in the market for real-time products will depend onboth the successful growth and emergence of these markets and their continuedneed for highly scalable, high performance and reliable object-basedtechnologies such as ours.  *Ourbusiness will likely be materially and adversely affected if the e-business andreal-time computing markets fail to grow and develop as quickly as we haveanticipated, or if our products fail to perform favorably in, or fail to becomean accepted component of, either of these markets.

 

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**Critical Accounting Policies**

 

The preparation of these consolidated financialstatements requires us to make estimates and judgments that affect the reportedamount of our assets and liabilities at the date of the financial statementsand of our revenues and expenses during the reporting period.  We base these estimates on historicalexperience and trends, our projections of future results, and on industry,economic and seasonal fluctuations. Although we believe these estimates arereasonable under the circumstances, and based on the information reasonablyavailable to us, there can be no assurances that this is so given that theapplication of these accounting policies necessarily involves the exercise ofjudgment and the use of assumptions as to future uncertainties.  We consider “critical” those accountingpolicies that require our most difficult, subjective, or complex judgments, andthat are the most important to the portrayal of our financial condition andresults of operations.  These criticalaccounting policies relate to revenue recognition, goodwill valuation and thedetermination of our reserve for doubtful accounts.

 

***Revenue Recognition***

 

We recognize revenue in accordance with the provisionsof Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” and SOP98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions.”   Revenueconsists mainly of revenue earned under software license agreements andmaintenance support agreements and agreements for consulting and trainingactivities.

 

We license our products to end-users, value-addedresellers and distributors through two types of perpetual licenses—developmentlicenses and deployment licenses. Development licenses are typically sold on a per seat basis andauthorize a customer to develop an application program that uses VDS or VersantenJin.   Before that customer may deployan application that it has developed under our development license, it mustpurchase deployment licenses based on the number of computers connected to theserver that will run the application using our database management system.  For certain applications, we offerdeployment licenses priced on a per user basis.  Pricing of VDS and Versant enJin varies according to severalfactors, including the number of computer servers on which the application willrun and the number of users that will be able to access the server at any onetime.  Customers may elect tosimultaneously purchase development and deployment licenses for an entireproject. These development and deployment licenses may also provide forprepayment of a nonrefundable amount for future deployment.

 

Revenue from software license arrangements, includingprepayment revenue, is recognized when all of the following criteria are met:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred;(3) the fee is fixed and determinable; and (4) collection is probable.  If an acceptance period or other contingencyexists, revenue is recognized upon satisfaction of the contingency, customeracceptance or expiration of the acceptance period.

 

Resellers, including value-added resellers anddistributors, purchase development licenses from us on a per seat basis, onterms similar to those of development licenses sold directly to end-users.  Resellers are authorized to sublicense deploymentcopies of VDS or Versant enJin that are either bundled or embedded in theresellers’ applications and sold directly to end users.  Resellers are required to report theirdistribution of Versant software and are charged a royalty that is based eitheron the number of copies of application software distributed or computed as apercentage of the selling price charged by the reseller to its end-usercustomers. Revenue from royalties is recognized when reported by the reseller,assuming collection is probable.

 

Revenue from our resale of third-party products isrecorded at total contract value with the corresponding cost included in costof sales when we act as a principal in these transactions and assume the risksand rewards of ownership, including the risk of loss for collection, deliveryor returns. When we do not assume the risks and rewards of ownership, revenuefrom our resale of third-party products or services is recorded at contractvalue net of the cost of sales.

 

Probability of collection is assessed using thefollowing customer information: credit service reports, bank and tradereferences, public filings, and/or current financial statements.  Prior payment experience is reviewed on allexisting customers.  Payment terms inexcess of our standard payment terms of 30-90 days net, are granted on anexception basis, typically in situations where customers elect to purchasedevelopment and deployment licenses simultaneously for an entire project andare attempting to align their payments with deployment schedules.  Extended

 

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payment terms are generally only granted to customers with a provenability to pay at the time the order is received, and with prior approval ofour senior management.

 

We use the residual method to recognize revenue when alicense agreement includes one or more elements to be delivered at a futuredate.   If there is an undeliveredelement under the license arrangement, we defer revenue based onvendor-specific objective evidence of the fair value of the undelivered element,as determined by the price charged when the element is sold separately. Ifvendor-specific objective evidence of fair value does not exist for allundelivered elements, we defer all revenue until sufficient evidence exists orall elements have been delivered. We defer revenue from license arrangementsthat require significant modification of the software and/or non-recurringengineering agreements requiring future obligations not yet performed andrecord it as revenue using contract accounting.

 

We defer revenue from maintenance and supportarrangements and recognize it ratably over the term of the arrangement, whichis typically twelve months.  Trainingand consulting revenue is recognized when a purchase order is received, theservices have been performed and collection is deemed probable.  Consulting services are billed on an hourly,daily or monthly rate.  Training classesare billed based on group or individual attendance.

 

***Goodwill Valuation***

 

We periodically evaluate whether events and circumstanceshave occurred which indicate that the remaining carrying value of goodwill maynot be recoverable.  When factorsindicate that goodwill should be evaluated for possible impairment, we will usean estimate of undiscounted future net cash flows to determine if theimpairment has occurred.  If wedetermine that goodwill has been impaired, we will record an impairment lossequal to the excess of the carrying amount of the goodwill over its fair value.

 

***Reserve for Doubtful Accounts***

 

Our reserve for doubtful accounts includes the specific identificationof bad debts and an unallocated reserve for doubtful accounts receivable.   The unallocated reserve is an estimatebased on our collection experience, bad debt write-off history, economicfactors that may effect customers’ abilities to pay, and accounts receivableaging trends.

 

**Results of Operations**

 

In2001, we filed a report on Form 8-K reporting the decision by our Board ofDirectors to change our fiscal year-end from December 31 to October 31. Thischange was made to better align our sales and financial reporting cycle withour customers’ procurement cycles. Consequently, the consolidated financial statements in Item 8 of thisreport include financial statements for the year ended December 31, 2000, theten months ended October 31, 2001 and the year ended October 31, 2002 becauseit was impracticable and not cost-justified to furnish complete financialstatements for the comparable periods ended October 31, 2001 and 2000.   We do not believe that seasonal or otherfactors affect the comparability of information or trends in those financialstatements.  However, when reviewingthis Item 7, readers should keep in mind that, because our transition periodended October 31, 2001 was a ten month (and not a twelve month) period, it ismore difficult to directly compare our results for that transition period withour twelve-month reported periods ended December 31, 2000 and October 31, 2002.We have been able, without undue cost, to provide unaudited dollar amounts forrevenues and expenses for the directly comparable unaudited ten month periodended October 31, 2000 and have presented these amounts in this “Management’sDiscussion and Analysis” section.

 

Asused in this Management’s Discussion and Analysis Section, references to “2002”mean the twelve month period ended October 31, 2002; references to “2001”, “tenmonth 2001 period” or “2001 reported period” each mean the ten month periodended October 31, 2001; references to “2000” or “2000 reported period” mean thetwelve month period ended December 31, 2000; and the term “comparable period”means the ten month period ended October 31, 2000.

 

18

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Thefollowing table summarizes the results of our operations as a percentage oftotal revenue for the periods presented:

 

|                              |   | **Twelve  Months****Ended  Oct 31, 2002** |   | **Ten****Months  Ended  Oct 31, 2001** |   | **Twelve  Months****Ended  Dec 31, 2000** |   | **Ten****Months  Ended  Oct 31, 2000** |   |
|-----------------------------------|--------|-------------------------------------------|--------|----------------------------------------|--------|-------------------------------------------|--------|----------------------------------------|--------|
|                              |   |                                      |   |                                   |   |                                      |   | **(unaudited)**                        |   |
| Revenue:                          |   |                                      |   |                                   |   |                                      |   |                                   |   |
| License                           |   | 51                                        | %      | 31                                     | %      | 66                                        | %      | 67                                     | %      |
| Services                          |   | 49                                        | %      | 69                                     | %      | 34                                        | %      | 33                                     | %      |
| Total revenue                     |   | 100                                       | %      | 100                                    | %      | 100                                       | %      | 100                                    | %      |
| Cost of revenue:                  |   |                                      |   |                                   |   |                                      |   |                                   |   |
| License                           |   | 6                                         | %      | 4                                      | %      | 3                                         | %      | 2                                      | %      |
| Services                          |   | 27                                        | %      | 49                                     | %      | 19                                        | %      | 20                                     | %      |
| Total cost of revenue             |   | 33                                        | %      | 53                                     | %      | 22                                        | %      | 22                                     | %      |
|                              |   |                                      |   |                                   |   |                                      |   |                                   |   |
| Gross profit margin               |   | 67                                        | %      | 47                                     | %      | 78                                        | %      | 78                                     | %      |
|                              |   |                                      |   |                                   |   |                                      |   |                                   |   |
| Operating expenses:               |   |                                      |   |                                   |   |                                      |   |                                   |   |
| Marketing and sales               |   | 39                                        | %      | 35                                     | %      | 35                                        | %      | 38                                     | %      |
| Research and development          |   | 29                                        | %      | 23                                     | %      | 21                                        | %      | 22                                     | %      |
| General and administrative        |   | 16                                        | %      | 11                                     | %      | 12                                        | %      | 14                                     | %      |
| Amortization of goodwill          |   | 1                                         | %      | 4                                      | %      | 2                                         | %      | 1                                      | %      |
| Restructuring                     |   |                                      |   | 3                                      | %      | 0                                         | %      | 0                                      | %      |
| Total operating expenses          |   | 85                                        | %      | 76                                     | %      | 70                                        | %      | 75                                     | %      |
| Income (loss) from operations     |   | (18                                       | )%     | (29                                    | )%     | 8                                         | %      | 3                                      | %      |
| Other income (expense), net       |   | 1                                         | %      | 0                                      | %      | (1                                        | )%     | (1                                     | )%     |
| Income (loss) before income taxes |   | (17                                       | )%     | (29                                    | )%     | 7                                         | %      | 2                                      | %      |
| Provision for income taxes        |   | 0                                         | %      | 0                                      | %      | 0                                         | %      | 0                                      | %      |
| Net income (loss)                 |   | (17                                       | )%     | (29                                    | )%     | 7                                         | %      | 2                                      | %      |

 

The following table summarizes the results of ouroperations for the periods presented:

 
|                              |   | **Twelve  Months  Ended** |   | **Ten  Months  Ended** |   | **Twelve  Months  Ended** |   | **Ten  Months  Ended** |   | **% change  in 10/31/02  from** |   | **% change  in 10/31/01  from** |   |
|-----------------------------------|--------|---------------------------|--------|------------------------|--------|---------------------------|--------|------------------------|--------|---------------------------------|--------|---------------------------------|--------|
|                              |   | **Oct 31,  2002**         |   | **Oct 31,  2001**      |   | **Dec 31,  2000**         |   | **Oct 31,  2000**      |   | **10/31/01**                    |   | **12/31/00**                    |   | **10/31/00** |   |
|                              |   |                      |   |                   |   |                      |   | **(unaudited)**        |   |                            |   |                            |   | **(unaudited)** |   |
| License revenue                   |   | $                         | 10,106 |                   | $      | 7,362                     |   | $                      | 18,859 |                            | $      | 15,117                          |   | 37 | % | (61 | )% | (51 | )% |
| Services revenue                  |   | 9,850                     |   | 16,547                 |   | 9,586                     |   | 7,314                  |   | (40                             | )%     | 73                              | %      | 126 | % |
| Total revenue                     |   | 19,956                    |   | 23,909                 |   | 28,445                    |   | 22,431                 |   | (17                             | )%     | (16                             | )%     | 7 | % |
|                              |   |                      |   |                   |   |                      |   |                   |   |                            |   |                            |   |   |   |
| Cost of license revenue           |   | 1,198                     |   | 936                    |   | 817                       |   | 422                    |   | 28                              | %      | 15                              | %      | 122 | % |
| Cost of services revenue          |   | 5,332                     |   | 11,737                 |   | 5,499                     |   | 4,389                  |   | (55                             | )%     | 113                             | %      | 167 | % |
| Total cost of revenue             |   | 6,530                     |   | 12,673                 |   | 6,316                     |   | 4,811                  |   | (48                             | )%     | 101                             | %      | 163 | % |
|                              |   |                      |   |                   |   |                      |   |                   |   |                            |   |                            |   |   |   |
| Operating expenses:               |   |                      |   |                   |   |                      |   |                   |   |                            |   |                            |   |   |   |
| Marketing and sales               |   | 7,854                     |   | 8,504                  |   | 10,304                    |   | 8,439                  |   | (8                              | )%     | (17                             | )%     | 1 | % |
| Research and development          |   | 5,835                     |   | 5,464                  |   | 5,866                     |   | 5,039                  |   | 7                               | %      | (7                              | )%     | 8 | % |
| General and administrative        |   | 3,144                     |   | 2,661                  |   | 3,305                     |   | 3,023                  |   | 18                              | %      | (19                             | )%     | (12 | )% |
| Amortization of goodwill          |   | 202                       |   | 396                    |   | 502                       |   | 419                    |   | (49                             | )%     | (21                             | )%     | (5 | )% |
| Write-Off goodwill                |   | —                    |   | 555                    |   | —                    |   | —                 |   | (100                            | )%     | 100                             | %      | 100 | % |
| Restructuring Costs               |   | —                    |   | 668                    |   | —                    |   | —                 |   | (100                            | )%     | 100                             | %      | 100 | % |
| Total operating expense           |   | 17,035                    |   | 18,248                 |   | 19,977                    |   | 16,920                 |   | (7                              | )%     | (9                              | )%     | 8 | % |
| Income (loss) from operations     |   | (3,609                    | )      | (7,012                 | )      | 2,152                     |   | 700                    |   | (49                             | )%     | (426                            | )%     | (1,102 | )% |
| Other income (expense), net       |   | 287                       |   | (53                    | )      | (222                      | )      | (167                   | )      | (642                            | )%     | (76                             | )%     | (68 | )% |
| Income (loss) before income taxes |   | (3,322                    | )      | (7,065                 | )      | 1,930                     |   | 533                    |   | (53                             | )%     | (466                            | )%     | (1,426 | )% |
| Provision for income taxes        |   | 68                        |   | 93                     |   | 74                        |   | 57                     |   | (27                             | )%     | 26                              | %      | 63 | % |
| Net income (loss)                 |   | $                         | (3,390 | )                      | $      | (7,158                    | )      | $                      | 1,856  |                            | $      | 476                             |   | (53 | )% | (486 | )% | (1,604 | )% |

 

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***Summary Overview***

 

Totalrevenue for the year ended October 31, 2002 decreased by 17% from our totalrevenue for the ten months ended October 31, 2001.  Service revenue for 2002 was down 40% from the 2001 reportedperiod while license revenues increased 37%. License revenues were 51% of total revenues in 2002 versus 31% in 2001and, because license revenues generate higher margins than our servicerevenues, our gross margin for 2002 in absolute terms was 19% higher than in2001 despite the overall reduction in revenues. Total operating expenses in2002 decreased 7% to $17.0 million in the year ended October 31, 2002 comparedto $18.2 million in the 2001 reported period. Net loss for 2002 was a 53%improvement over the reported period in 2001.

 

Ofthe $7.0 million net operating loss in the reported ten month 2001 period, $3.4million or 49% occurred in the first quarter and $2.9 million or 41% occurredin the one-month period ended October 31, 2001. Lower than expected VDS salesto our telecommunications customers accounted for the bulk of the loss in thefirst quarter of fiscal 2001 while a goodwill write-off and restructuring costswere the main components of the one month period loss.

 

***Revenue***

 

Totalrevenue decreased 17% to $20.0 million in the twelve month period ended October31, 2002 from $23.9 million in the ten-month period ended October 31,2001.  Total revenue decreased 16% inthe ten month 2001 period compared to the 12 months ended December 31, 2000,but increased 7% over total revenue of $22.4 million in the comparable periodof 2000. The revenue decline in 2002 versus 2001 is largely attributableto the worsening of the overall macroeconomic environment. Revenue from telecomand financial services customers constituted 36% of our total revenue in 2002compared with 57% in the ten month period ended October 31, 2001.  Telecom customers were particularly important,comprising 30% of our total revenue in 2002 and 53% of our total revenue in theten months ended October 31, 2001. Revenues from the defense sector have increased and somewhat mitigateddeclines in the commercial sector, accounting for 14% of our total revenue in2002 and 4% in 2001.

 

Despite the absolutedecline in revenue, our recent overall transaction volume has increased. Webooked a significantly larger number of transactions that provided revenue inexcess of $10,000 in 2002 compared to 2001 and 2000. 

 

The revenue increase inthe ten month 2001 period versus the ten month comparable period in 2000 wasdue to higher consulting services revenue, in particular, a significant longterm consulting engagement with a telecom customer.  This increased consulting services revenue was offset bydecreased license revenue.  We had onecustomer, IBM that represented 14% of our total revenue in 2002 and twocustomers that represented 28% and 11% of total revenue in 2001. No customerrepresented more than 10% of our total revenue in 2000.

 

International revenue asa percentage of our total revenue was 32% in 2002, 28% in 2001 and 39% in 2000.International revenues decreased slightly to $6.4 million in 2002 from $6.5million in 2001, due to lower revenues in Australia, and decreased from $11.2million in 2000.  The decrease in thereported period of 2001 versus 2000 was the result of the economic downturn,especially as it applied to the telecommunications industry, which has had amore marked effect on international sales than on domestic sales particularlyin Europe. *We intend to maintain our sales and marketing activities outsidethe United States, which include supporting our subsidiaries, distributors andresellers in Europe, Japan and other Asia/Pacific countries,****whichwill require significant management attention and financial resources, andwhich may increase costs and impact margins unless and until correspondingrevenue is achieved.

 

Our international salesare made at the foreign currency equivalent of a U. S. dollar based price.  An increase in the value of the UnitedStates dollar relative to foreign currencies could make our products moreexpensive and, therefore, less competitive in foreign markets. *To the extentthat we increase our international sales, our total revenue may be affected toa greater extent by seasonal fluctuations resulting from lower sales levelsthat typically occur during the summer months in Europe and other parts of theworld.

 

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*Consistent with ourindustry, we continue to experience significant quarterly fluctuations in totalrevenue and believe this trend will continue in 2003.

 

License Revenue

 

License revenue increased37% to $10.1 million in 2002 from $7.4 million in the ten month 2001 periodprimarily due to increased deployment license revenues (specifically in thedefense sector) and secondarily due to the resale of third party software,which represents 9% of our 2002 license revenues.

 

License revenue decreased61% to $7.4 million in the ten month 2001 period  compared to $18.9 million for the year ended December 31, 2000and decreased  51% from the comparableperiod of 2000.  With the recenteconomic downturn IT capital spending was delayed or eliminated and the impactof this was most dramatically felt in significantly reduced sales of VDSdeployment licenses to the telecommunications sector in 2001.

 

Deployment licenserevenues accounted for 75% of total license revenues in 2002 versus 62% and 81%for the reported periods of 2001 and 2000 respectively. *We consider this animportant indicator of the relevance of our technology in the marketplace andare encouraged that deployment license revenue in 2002 returned to a level moreconsistent with historical norms in comparison with  2001, in which deployments of our technology slowed down,especially in the telecom sector.

 

Services revenue

 

Services revenue consistsof revenue from consulting, training and technical support as well as billabletravel expenses incurred by our service organization.  Services revenue decreased 40% to $9.9 million in 2002 from $16.5million in  the ten month 2001 periodand increased in the ten month 2001 period 73% from our reported period in 2000 and 126% from the 2000 comparableperiod, respectively. These decreases in 2002 services revenue versus 2001 andincreases in service revenue in 2001 versus 2000 were mainly the result ofsub-contracted service engagements, in particular a significant U.S. engagementfor a telecommunications customer that commenced in December 2000 and concludedin November 2001.  The reduction in 2002consulting revenue reflected IT managers’ preference to either delay consultingprojects or bring the work in-house and avoid using outside consultants(Versant employees) due to tight IT budget constraints.  This directly impacted Versant’sprofessional services business. However, our dedicated WebSphere consultingpractice was 126% higher in 2002 than in the ten month 2001 period.

 

***Cost of Revenue and Gross Profit Margins***

 

Total cost of revenue decreased 48% to $6.5 million in2002 from $12.7 million in the ten month 2001 period and increased 101% to$12.7 million in the ten month 2001 period from $6.3 million in our 2000reported period and increased 163% from the comparable period of 2000. Cost ofrevenue was 33% of total revenue in 2002, 53% of total revenue in the ten month2001 period, 22% of total revenue for our reported period in 2000 and 22% oftotal revenue for the comparable period in 2000. The key factors causing thesevariations in cost of revenue  areprimarily the mix of our product sales and secondarily sales volume. Ingeneral, a higher proportion of license revenue will result in lower overalltotal costs of revenue, followed by maintenance revenues with consultingrevenues attracting the highest costs. License revenue was 51% of total revenuein 2002 versus 31% in the ten month 2001 period and 66% in the reported periodof 2000.  Hence, our total cost ofrevenue was a lower percentage of revenue in 2002 and 2000 (years with a higherpercentage of license revenue) than in the ten month 2001 period (in which thepercentage of license revenue was relatively lower).

 

Cost of license revenue

 

Cost of license revenue consists primarily of reservesfor estimated bad debts, product royalty obligations incurred by us when wesublicense tools provided by third parties, user manuals, product media,production labor costs, freight and packaging. Cost of license revenue inabsolute dollars increased 28% in 2002 to $1.2 million as compared to $936,000in the ten month 2001 period.  Howevercost of license revenue was 12% of license revenue in 2002 versus 13% oflicense revenue in 2001 implying that the absolute cost increase was more afunction of volume. However

 

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within 2002’s cost numbers, the cost of reselling third party software,an activity that began in 2002, was $863,000 and was somewhat offset byincurring the amortization of royalty costs associated with our enJin productonly through June 2002 (eight months) versus ten months in 2001.

 

Total cost of license revenue increased 15% in the tenmonth 2001 period over the reported period in 2000 and increased 122% from thecomparable period in 2000. Cost of license revenue was 13% of license revenuein the ten month 2001 period versus 4% and 3% of license revenue in thereported and comparable periods of 2000. The increase in license cost in 2001 when compared to the reportedperiod in 2000 was mainly attributable to the amortization of royalty costs associatedwith our enJin product. The increase over the comparable period in 2000 was dueto an increase in bad debt reserve at the end of calendar 2000 not reflected inthe comparable period.

 

Cost of services revenue

 

Cost of services revenueconsists principally of personnel costs (both employee and sub-contractors)associated with providing consulting, technical support and training.  Cost of services revenue in absolute dollarsdecreased 55% to $5.3 million in 2002 from $11.7 million in the ten month 2001period. A large part of this variance is volume related due to the 40%reduction in services revenue in 2002. However largely because higher cost consulting revenues were a lowerpercentage of the overall services revenue mix in 2002 versus 2001, cost ofservice revenue in 2002 decreased to 54% of services revenue from 71% in theten month 2001 period.

 

Cost of services revenue increased 113% to $11.7million in the ten month 2001 period from $5.5 million in the reported periodof 2000 and increased 167% over cost of services revenue of $4.4 million in thecomparable period of 2000.  Theincreases in cost of services revenue in 2001 over 2000 were largely due to therevenue growth in higher cost consulting revenues.  The high consulting content in the overall services revenue mixin 2001 resulted in relatively higher costs in 2001 versus 2000, where the mixwas not so heavily skewed toward consulting service revenue. Consequently, costof service revenue was 71% of services revenue in 2001 versus 57% of servicesrevenue in 2000, and 60% of services revenue for the comparable period in 2000.

 

***Marketing and SalesExpenses***

 

Marketing and salesexpenses consist primarily of marketing and sales labor costs, salescommissions, recruiting, business development, travel, advertising, publicrelations, seminars, trade shows, lead generation, marketing and salesliterature, product management, sales offices, occupancy and depreciationexpense.

 

Marketing and salesexpense decreased 8% in 2002 to $7.9 million from $8.5 million in the ten month2001 period as a result of lower commission expense corresponding with thelower overall revenue levels, lower marketing program costs and some headcountreductions. Average marketing and sales headcount during 2002 was 32 versus 38during 2001. Operating expenses tend to accrue more evenly throughout the year(versus revenue that is less linear). Annualizing the reported expense in 2001 by multiplying it by 12/10 toprovide an estimated twelve month comparison with 2002 would increase this 8%reduction in 2002 to an approximate reduction of 23%.

 

As a percentage ofrevenue, marketing and sales expense was 39% in 2002 versus 35% in the tenmonth 2001 period. While some marketing and sales expense is variable ordiscretionary, other marketing and sales expenses, such as sales force salariesand rent are more fixed in nature, and therefore represent a larger percentageof 2002’s reduced  revenue number.

 

Marketing and salesexpense decreased 17% in the ten month 2001 period from $10.3 million in thereported period in 2000, primarily due to comparing ten months in 2001 withtwelve months in 2000 but remained relatively consistent when compared to thecomparable period of 2000. As a percentage of revenue, marketing and salesexpense was 35% in 2001 versus 35% and 38% in the reported and comparableperiods of 2000, respectively, and thus remained relatively consistent as apercentage of revenue in these periods.

 

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***Research and Development Expenses***

 

Research and development expenses consist primarily of salaries,recruiting and other employee-related expenses, depreciation, and expensesassociated with development tools, equipment, supplies and travel. Research anddevelopment expenses increased 7% in 2002 to $5.8 million over $5.5 million forthe ten month 2001 period. As noted above, operating expenses tend to accruemore evenly throughout the year (versus revenue that is less linear).  Annualizing the reported research anddevelopment expense in 2001 by multiplying it by 12/10 to provide an estimatedtwelve month comparison with 2002 would transform this 7% increase in 2002 to adecrease of approximately 11% which is consistent with expense reductionprograms we implemented in 2002. Average research and development headcountduring 2002 was 63 versus 66 during 2001. As a percentage of revenue, researchand development expense was 29% in 2002 versus 23% in 2001. The increase as apercentage of revenue was the result of a decline in revenues without acorresponding decrease in research and development expense.

 

Research and development expenses of $5.5 million inthe ten month 2001 period represented a decrease of 7% from $5.9 million in thereported period of 2000 and an increase of 8% over $5.0 million in thecomparable period of 2000. The decrease in 2001 versus the reported period of2000 was primarily due to comparing ten months in 2001 with twelve months in2000.  The increase in 2001 versus the comparableperiod of 2000 was the result of headcount increases, primarily to supportapplication server integration and synchronization efforts.  As a percentage of revenue, research anddevelopment expense was 23% in 2001 versus 21% and 22% in the reported andcomparable periods of 2000, respectively and thus remained relativelyconsistent as a percentage of revenue in these periods.

 

*We believe that a significant level of research anddevelopment expenditures is required to remain competitive and completeproducts under development.  *Accordingly,we anticipate that we will continue to devote substantial resources to researchand development to design, produce and increase the quality, competitivenessand acceptance of our products. *However, if we continue our research anddevelopment efforts without corresponding increases in revenue, our results ofoperations would be adversely affected. To date, all research and development expenditures have been expensed asincurred.

 

***General andAdministrative Expenses***

 

General and administrative expenses consist primarilyof salaries, benefits and other employee related costs for our finance, humanresources, legal and executive management functions.  In addition, general and administrative expenses include outsidelegal, audit and public reporting costs, as well as legal, accounting and salestax accruals.

 

General and administrative expenses increased 18% to$3.1 million in 2002 from $2.7 million in the ten month 2001 period, with theincrease being more a function of comparing twelve months of expenses in 2002with ten months in 2001. Operating expenses tend to accrue more evenlythroughout the year (versus revenue, which is less linear).  Thus, annualizing the reported general andadministrative expense in 2001 by multiplying it by 12/10 to provide an estimatedtwelve month comparison with 2002 would transform this 18% increase in 2002 toa decrease of approximately 2%. Headcount reductions in 2002 (average generaland administrative headcount during 2002 was 16 versus 18 during 2001) weresomewhat offset by increased legal fees. As a percentage of revenue, generaland administrative expense was 16% in 2002 versus 11% in the ten month 2001period. Most general and administrative expense is relatively fixed in nature,for example salaries, rent and audit and legal fees and therefore represents alarger percentage of revenue when total revenues are decreased.

 

General and administrative expenses decreased 19% inthe ten month 2001 period from $3.3 million in the reported period in 2000 anddecreased 12% from the comparable period in 2000 as a result of reducedheadcount and lower legal and accounting costs. As a percentage of revenue,research and development expense was 11% in 2001 versus 12% and 14% in thereported and comparable periods of 2000 respectively.

 

***Amortization and Write-down of Goodwill***

 

Our acquisition of Versant Europe in March 1997resulted in our recording goodwill of $3.3 million. This goodwill was beingamortized on a straight-line basis over seven years, but we changed thisestimate to a five-year period in 1998. We amortized approximately $187,000 ofthis amount in 2002, $156,000 of this amount in 2001 and $187,000 of thisamount in 2000.  SFAS No. 142, which weadopted on November 1, 2002, requires that existing goodwill is no

 

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longer subject to amortization. As of October 31, 2002, we have goodwill for Versant Europe ofapproximately $219,000 which will no longer be amortized.  Instead this goodwill amount will now besubject to periodic evaluations for impairment and will be reduced to theextent of that impairment.  See notes 3and 4 to our consolidated financial statements included in Item 8 of thisreport.

 

Our acquisition of Soft Mountain in September 1998resulted in our recording goodwill of $1.2 million, which was being amortizedover a five-year period.  In October 31,2001, we wrote off the remaining $555,000 net book value of the goodwillrelated to Soft Mountain because the carrying value of the asset was impairedas a result of the abandonment of the product and the closure of our office inFrance.

 

As of October 31, 2002, we have additional goodwill of$21,000, which will no longer be amortized.

 

***Restructuring Costs***

 

On October 31, 2001, we implemented a restructuringplan aimed at optimizing our performance in Europe.  The primary goal was to reduce operating expenses, whilemaintaining current revenue streams in Europe. As a result, we changed ourdistribution model in France from a wholly owned subsidiary to an independentdistributor structure.  As a result ofthis restructuring we incurred one-time costs related to employee severancepayments, related benefit and outplacement expenses, termination of a buildinglease and accounting and legal costs associated with the closure of the officeand the write-off of the carrying value of fixed assets. The total cost of therestructuring was estimated at $668,000 and was recorded as restructuring costsin operating expenses in the ten months ended October 31, 2001.  All remaining obligations are expected to bepaid by April 30, 2003.

 

The following table summarizes the Company’srestructuring activity at October 31, 2002:

 

| **Restructuring Costs**                            |   | **Balance at  Oct 31, 2001** |    | **FY 2002  Usage** |   | **Balance at  October 31,  2002** |   |
|----------------------------------------------------|--------|------------------------------|---------|--------------------|--------|-----------------------------------|--------|
| Employee  severance and related costs              |   | $                            | 290,000 |               | $      | (290,000                          | )      | $ | — |   |
| Lease  termination and building costs              |   | 160,000                      |    | (160,000           | )      | —                            |   |
| Professional  fees                            |   | 110,000                      |    | (101,454           | )      | 8,546                             |   |
| Write-off of  fixed assets                         |   | 62,000                       |    | (62,000            | )      | —                            |   |
| Write-off of  other current assets and liabilities |   | 46,000                       |    | (46,000            | )      | —                            |   |
| Total  restructuring                               |   | $                            | 668,000 |               | $      | (659,454                          | )      | $ | 8,546 |   |

 

***Other Expense, Net***

 

Other income (expense), net represents the interestexpense associated with our financing activities offset by income earned on ourcash and cash equivalents and the foreign currency gain or loss as a result ofentering into transactions denominated in currencies other than our localcurrency.  We reported net other incomeof $287,000 in 2002, net other expense of $53,000 in the ten month 2001 period,net other expense of $222,000 in the reported period of 2000 and net otherexpense of $167,000 in the comparable period of 2000.  In 2002, we received a $200,000 refund of an insurance deductiblepaid in prior periods and experienced lower interest payments on capital leasesand bank loans.

 

***Provision for Income Taxes***

 

We account for income taxes in accordance withStatement of Financial Accounting Standards (SFAS) No. 109, “Accounting forIncome Taxes.”  We incurred netoperating losses in 2002, 2001 and 1999. We also incurred foreign withholdingtaxes of  $68,000, $93,000 and $74,000in 2002, 2001, and 2000, respectively, which are included within the income taxprovision.

 

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At October 31, 2002, we had federal and state netoperating loss carryforwards of  $43.5million and $10.2 million, respectively, and tax credit carryforwards of  $3.0 million expiring on various datesthrough 2022.  Due to our history ofoperating losses and other factors, we believe that there is sufficientuncertainty regarding the realizability of these carryforwards, and therefore avaluation allowance of approximately $19.7 million has been recorded againstour net deferred tax assets of approximately $19.7 million. Approximately $1.5million of the valuation allowance for deferred tax assets is attributed toemployee stock deductions the benefit from which will be allocated toadditional paid in capital when and if subsequently realized. We will continueto assess the realizability of the tax benefit available to us based on actualand forecasted operating results.

 

Due to the “change in ownership” provisions of theInternal Revenue Code of 1986, the availability of net operating loss and taxcredit carryforwards to offset federal taxable income in future periods issubject to an annual limitation due to changes in ownership for income taxpurposes.

 

**Liquidityand Capital Resources**

 
|                                                          |   | **Year Ended  October 31,  2002** |   | **%  Change** |   | **Ten Months  Ended  October 31,  2001** |   | **%  Change** |   | **Year Ended  December 31,  2000** |   |
|---------------------------------------------------------------|--------|-----------------------------------|--------|---------------|--------|------------------------------------------|--------|---------------|--------|------------------------------------|--------|
| Net cash  provided by (used in) operating activities          |   | 509,000                           |   | 57            | %      | 325,000                                  |   | (2808         | )%     | (12,000                            | )      |
| Net cash used in  investing activities                        |   | 22,000                            |   | (113          | )%     | (171,000                                 | )      | (69           | )%     | (555,000                           | )      |
| Net cash  provided by (used in) financing activities          |   | (281,000                          | )      | (17           | )%     | (338,000                                 | )      | (130          | )%     | 1,097,000                          |   |
| Period-end cash,  cash equivalents and short-term investments |   | 4,427,000                         |   | 8             | %      | 4,101,000                                |   | (4            | )%     | 4,280,000                          |   |
| Period-end  working capital                                   |   | 2,326,000                         |   | (37           | )%     | 3,664,000                                |   | (53           | )%     | 7,863,000                          |   |

 

In fiscal 2002, operating activities provided net cash of$509,000.  Net loss of $3.4 million wasoffset by a reduction of accounts receivable of $2.2 million and depreciationand amortization costs of $1.3 million and other Items.   In the ten months ended October 31, 2001,operating activities provided net cash of $325,000.  Our net loss for the ten month 2001 period, which was generatedprimarily in the first quarter of 2001, was offset by a reduction of accountsreceivable of $4.8 million and non-cash expense related to depreciation andamortization of $1.5 million. In fiscal 2000, net cash of $12,000 was used inoperating activities with net income as increased by depreciation andamortization being offset primarily by a $4.7 million increase in accountsreceivable due primarily to the granting of extended payment terms for certainqualified customers.

 

In fiscal 2002, investing activities provided $22,000net cash, which was the result of the proceeds from the sale of obsoleteequipment that was offset in part by the purchase of equipment.  In the ten month 2001 period and in 2000,net cash used in investing activities was $171,000 and $555,000, respectively,for the purchase of equipment needed to support our growth.

 

In fiscal 2002, we used $281,000 net cash in financingactivities.  Repayment of borrowings of$550,000 under our bank line and principal payments of $56,000 under capitallease obligations were only partially offset by the proceeds of $325,000 fromthe sale of common stock in connection with our employee stock purchaseplan.  In the ten month 2001 period, netcash used in financing activities was $338,000 due to net payments under ourline of credit of $770,000 offset by $476,000 in proceeds from the exercise of employeestock options and the sale of common stock to our employees under employeebenefit plans.  In fiscal 2000,financing activities provided a net increase in cash of $1.1 million, primarilyfrom the sale of common stock to our employees under employee benefit plans andsecondarily due to proceeds from the exercise of warrants to purchase commonstock, offset by the paydown of our short-term bank borrowings, plus the normalprincipal payments made under capital lease obligations.

 

At October 31, 2002, we had $4.4 million in cash and cash equivalents,a slight increase from $4.1 million in cash and cash equivalents as of October31, 2001.  As of October 31, 2002 ourworking capital of approximately $2.3 million represented  a decrease from the $3.7 million of workingcapital we had as of October 31, 2001. We maintain a revolving credit line with a bank that expires in April2003.  The maximum amount that can beborrowed under the revolving credit line is the lesser of $5.0 million or 80%of eligible accounts receivabe.  As ofOctober 31, 2002, there were no borrowings outstanding under this line. As ofOctober 31, 2001, $500,000 of borrowings were outstanding; and this balance wasrepaid in November 2001.  Borrowings aresecured by a lien on substantially all of our

 

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assets.  Borrowings outstandingbear interest at prime rate plus 4.00% (8.75% at October 31, 2002). The amountavailable under this line fluctuates monthly based on the eligibility of ourreceivables and is not indicative of future availability under this line. Theloan agreement contains no financial covenants, and prohibits cash dividendsand mergers and acquisitions without the bank’s prior approval.

 

At October 31,2002, our commitments for capital expenditures were not material. Futureminimum lease payments under non-cancelable operating leases are $1,397,000 forthe year ending October 31, 2003, and $4,739,000 in total thereafter.

 

Although we expect to be able to effectively manageour cash resources, there can be no assurance that our cash resources will beadequate as our operating results are very difficult to predict and we aredependent upon future events, including our ability to successfully renew ourcurrent revolving credit line or obtain additional debt or equity financing, iffinancial results fall short of our goals. Additionally, nearly all of ourrevenue to date has been derived from two products, consequently, if ourability to generate revenue from either of these products was negativelyimpacted, our cash flow would be materially adversly affected. Further, withour acquisition of Mokume Software in November 2002, we have begun to develop anew "real-time" business strategy. These efforts may increase ouroperating costs and if we fail to timely generate revenue from our real-timebusiness, our cash flow could be adversely affected.  *Accordingly, additional debt or equity financing may be requiredor desirable.  However, additional debtor equity financing may not be available to us on commercially reasonable terms,or at all and the prices at which new investors would be willing to purchaseour securities may be lower than the market value or trading price of ourcommon stock. The sale of additional equity or convertible debt securitiescould result in dilution to our shareholders, which could be substantial andmay involve the issuance of preferred securities that would have liquidationpreferences that entitle holders of the preferred securities to receive certainamounts before holders of common stock in connection with an acquisition orbusiness combination involving Versant or a liquidation of Versant. Newinvestors may also seek agreements giving them additional voting control orseats on our board of directors.  Evenif we were able to obtain additional debt or equity financing, the terms ofthis financing might significantly restrict our business activities.  *Cash may also be needed to acquire orinvest in complementary businesses or products or to obtain the right to usecomplementary technologies and we expect that, in the event of such anacquisition or investment, we will need to seek additional debt or equityfinancing.

 

*We believe that our current cash, cash equivalentsand line of credit, and any net cash provided by operations, will be sufficientto meet our anticipated cash needs for working capital and capital expendituresfor 2003.  *We base this assertion onthe following factors:

 

•                  First, our forecasted operatingexpense for Q1 2003 is in the range of 4.2 to 4.4 million dollars. Thisincludes the small incremental “cash expense” that the Mokume acquisitionbrings. Although slightly higher than Q4 of 2002, this forecasted expense levelis still at near time lows for Versant. We have proven our commitment toexpense management but not, we feel, at the price of disabling our ability toexecute on our strategy. The Mokume acquisition underlines this point; as wellas bringing new resources into the company to support our real time businessinitiative we have also refocused existing resources to this end.

•                  Our Days Sales Outstanding (DSO) atthe end of 2002 was 78 days and was second only to Q1 of 2002 in being our bestperformance as a public company. We remain committed to the objective ofkeeping this metric within this range.

•                  We have a lineof credit that’s readily available to iron out short-term fluctuations whichhas remained largely unutilized up to now; however that credit line limits ourborrowing to the lesser of $5.0 million or 80% of eligible accounts receivableand expires in April of 2003, unless renewed.

 

**RecentlyIssued Accounting Pronouncements**

** **

In December 2002, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 148 (SFAS 148), *Accountingfor Stock-Based Compensation - Transition and Disclosure*. SFAS 148amends FASB Statement No. 123 (SFAS 123), *Accountingfor Stock-Based Compensation*, to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, SFAS 148 amends thedisclosure requirements of SFAS 123 to require prominent disclosures in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The transition guidance andannual disclosure provisions of SFAS 148 are effective for fiscal years endingafter December 15, 2002.  The interimdisclosure provisions are effective for financial reports containing financialstatements for interim periods beginning after December 15, 2002.  The Company is currently evaluating theimpact of adoption of SFAS 148 on its financial position and results ofoperations.

 

In November 2002, the EITFreached a consensus on Issue No. 00-21 (EITF 00-21), *Revenue Arrangements with Multiple Deliverables*. EITF 00-21addresses certain aspects of the accounting by a vendor for arrangements underwhich the vendor will perform multiple revenue generating activities. EITF00-21 will be effective for interim periods beginning after June 15, 2003. TheCompany is currently evaluating the impact of adoption of EITF 00-21 on itsfinancial position and results of operations.

 

In November 2002, the FASB issued Interpretation No.45 (Interpretation 45), *Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others*, which clarifies disclosure andrecognition/measurement requirements related to certain guarantees.  The disclosure requirements are effective forfinancial statements issued after December 15, 2002 and therecognition/measurement requirements are effective on a prospective basis forguarantees issued or modified after December 31, 2002.  The Company is currently evaluating theimpact of adoption of Interpretation 45 on its financial position and resultsof operations.

 

In July 2001, the FASB issued SFAS No. 142, *Goodwill and Intangible Assets*, whichsupersedes APB Opinion No. 17, *IntangibleAssets*.  Under SFAS No. 142,goodwill and intangible assets with indefinite lives are not amortized but aretested for impairment annually (unless indication of impairment becomesapparent sooner) using the fair value approach (except in certaincircumstances), while other intangible assets will continue to be valued andamortized over their estimated lives, and in-process research and developmentwill continue to be written off immediately. All acquired goodwill must beassigned to reporting units for purposes of impairment testing and segmentreporting and, effective January 1, 2002 for fiscal years commencing afterDecember 31, 2001,  existing goodwillwill no longer be subject to amortization. Due to our recent change in fiscalyear-end from December 31 to October 31, we adopted SFAS No. 142 on November 1,2002, from which date, we will no longer amortize goodwill.

 

In April 2002, the FASB issued SFAS No. 145, *Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB SFAS No. 13, and Technical Corrections*.  SFAS 145 rescinds SFAS 4, *Reporting Gains and Losses from Extinguishment ofDebt-an amendment of APB Opinion No. 30*, which required all gainsand losses from

 

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extinguishment of debt to be aggregated and, if material, classified asan extraordinary item, net of related income tax effect. SFAS 145 also makesnon-substantive technical corrections to existing pronouncements. SFAS No. 145is effective for fiscal years beginning after May 15, 2002 with earlieradoption encouraged.  We do not expectthe provisions of SFAS No. 145 to have a material impact on our financialposition or results of operations.

 

In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*.  SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.94-3, *Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (IncludingCertain Costs Incurred in a Restructuring)*.  This statement requires recognition of aliability for a cost associated with an exit or disposal activity when theliability is incurred, as opposed to when the entity commits to an exit planunder EITF No. 94-3. This statement also establishes that fair value isobjective for initial measurement of the liability. The provisions of thisstatement are effective for exit or disposal activities that are initiatedafter December 31, 2002.  We do notbelieve the adoption of SFAS No. 146 will have a material impact on ourfinancial position or results of operations.

 

**QuarterlyInformation (unaudited):**

 

Summarized quarterly supplemental consolidatedfinancial information for 2002 and 2001 is as follows:

 
|                                 |   | **Fiscal 2002 Quarters Ended**                |   | **Calendar 2001 Quarters Ended** |   | **One Month  Ended** |   |
|--------------------------------------|--------|-----------------------------------------------|--------|----------------------------------|--------|----------------------|--------|
|                                 |   | **Jan 31,**                                   |   | **Apr 30,**                      |   | **Jul 30,**          |   | **Oct 31,** |   | **Mar 31,** |   | **June 30,** |   | **Sept 30,** |   | **Oct 31,** |   |
|                                 |   | **(in thousands, except per share dat****a)** |   |
|                                 |   |                                          |   |                             |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                              |   | $                                             | 6,104  |                             | $      | 4,701                |   | $ | 4,449 |   | $ | 4,702 |   | $ | 5,214 |   | $ | 8,213 |   | $ | 8,619 |   | $ | 1,008 |   |
|                                 |   |                                          |   |                             |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                         |   | 4,085                                         |   | 2,726                            |   | 3,114                |   | 3,501 |   | 2,044 |   | 4,054 |   | 5,050 |   | 88 |   |
|                                 |   |                                          |   |                             |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Operating income  (loss)             |   | (618                                          | )      | (1,386                           | )      | (1,280               | )      | (325 | ) | (3,411 | ) | (682 | ) | 7 |   | (2,926 | ) |
|                                 |   |                                          |   |                             |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss)                   |   | (578                                          | )      | (1,082                           | )      | (1,323               | )      | (407 | ) | (3,585 | ) | (706 | ) | 40 |   | (2,907 | ) |
|                                 |   |                                          |   |                             |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Basic net income  (loss) per share   |   | (0.05                                         | )      | (0.09                            | )      | (0.11                | )      | (0.03 | ) | (0.30 | ) | (0.06 | ) | 0.00 |   | (0.24 | ) |
|                                 |   |                                          |   |                             |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Diluted net  income (loss) per share |   | (0.05                                         | )      | (0.09                            | )      | (0.11                | )      | (0.03 | ) | (0.30 | ) | (0.06 | ) | 0.00 |   | (0.24 | ) |
|                                      |        |                                               |        |                                  |        |                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**RiskFactors**

 

*This Form 10-K contains forward-looking statements thatinvolve risks and uncertainties, including, but not limited to, those set forthbelow, that could cause actual results to differ materially from those in theforward-looking statements.  The mattersset forth below should be carefully considered when evaluating our business andprospects.*

 

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***Risks Related to Our Business***

 

***We have limited working capital and mayexperience difficulty in obtaining needed funding, which may limit our abilityto effectively pursue our business strategies.*** At October 31, 2002, we had $4.4 million incash and cash equivalents and working capital of approximately $2.3 million. Todate, we have not achieved profitability or positive cash flow on a sustainedbasis.  *Although we believe that ourcurrent cash, cash equivalents, line of credit, and any net cash provided byoperations will be sufficient to meet our anticipated cash needs for workingcapital and capital expenditures for the next twelve months, it is possiblethat events may occur that could render our current working capital reservesinsufficient.  Because our revenue isunpredictable and a significant portion of our expenses are fixed, a reductionin projected revenue or unanticipated requirements for cash outlays coulddeplete our limited financial resources. For example, our new real-time business initiative may increase ouroperating expenses, and if revenues from the real-time business don’tmaterialize when anticipated our working capital could be adverselyimpacted.  Impairment of our workingcapital would require us to make expense reductions and/or to raise fundsthrough borrowing or debt or equity financing.   If we require additional external funding, there can be noassurance that we will be able to obtain it under our bank line of creditbecause borrowings under our credit line are limited to eligible accountsreceivable.  In addition, when our bankline expires in April 2003, there can be no assurance that it will berenewed.  Likewise, there can be noassurance that any equity or debt funding will be available to us on favorableterms, if at all.  If we cannot secureadequate financing sources, then we would be required to reduce our operatingexpenses, which would restrict our ability to pursue our business objectives.

 

***We are dependent on a limited number ofproducts***.   Nearlyall of our revenue to date is derived from two products, VDS and VersantenJin.  Consequently, if our ability togenerate revenue from either of these products, particularly VDS, werenegatively impacted, our business, cash flow and results of operations would bematerially adversely affected.  Manyfactors could negatively impact our ability to generate revenue from VDS andenJin, including without limitation the success of competitive products ofother vendors, reduction in the prices we can obtain for our products due tocompetitive factors, the adoption of new technologies or standards that makeeither product technologically obsolete or customer reluctance to invest inobject-oriented technologies.   Althoughwe plan to eventually diversify our product line through our real-time businessinitiative, we have not yet successfully developed or released any significantreal time product offerings and there can be no assurance that we will doso.  Further, even if we succeed in timelydeveloping and releasing new real-time products, there can be no assurance thatsuch products will be well-received by the market or that they will generateany substantial revenue.  Accordingly,any significant reduction in revenue levels from VDS or Versant enJin can beexpected to have a strong negative impact on our business and results ofoperation.

 

***Our revenue levels are not predictable. ***Our revenue hasfluctuated dramatically on a quarterly basis, and we expect this trend tocontinue.  These quarterly fluctuationsresult from a number of factors, including:

 

•                  delays by ourcustomers in signing revenue-bearing contracts that were expected to be enteredinto in a particular fiscal quarter;

•                  generalmacroeconomic factors as they impact IT capital purchasing decisions;

•                  the lengthysales cycle associated with our products;

•                  customer andmarket perceptions of the value and currency of object-oriented softwaretechnology;

•                  uncertaintyregarding the timing and scope of customer deployment schedules of applicationsbased on VDS and Versant enJin;

•                  fluctuations indomestic and foreign demand for our products and services, particularly in thetelecommunications, financial services, e-business and defense markets;

•                  the impact ofnew product introductions, both by us and by our competitors;

•                  ourunwillingness to lower prices significantly to meet prices set by ourcompetitors;

•                  the effect ofpublications of opinions about us and our competitors and their products;

•                  customer orderdeferrals in anticipation of product enhancements or new product offerings byus or our competitors; and

•                  potentialcustomers’ unwillingness to invest in our products given our perceivedfinancial instability.

 

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***We may not be able to manage costs effectively given theunpredictability of our revenue.*** *We expect to continue to maintain arelatively high level of fixed expenses, including expenses related to our newreal-time business. If planned revenue growth, including revenue from real-timeproducts, does not materialize, our business, financial condition and resultsof operations will be materially harmed.

 

***Our customer concentration increases the potentialvolatility of our operating results.***  A significant portion of our total revenuehas been, and we believe will continue to be, derived from a limited number oforders placed by large organizations. For example, one customer represented 14% of total revenue in 2002 andtwo customers represented 15% and 13% of our total revenue for the ten monthsended October 31, 2001.  The timing oflarge orders and of their fulfillment has caused, and in the future is likelyto cause, material fluctuations in our operating results, particularly on aquarterly basis. In addition, our major customers tend to change from year to year.  The loss of any one or more of our majorcustomers or our inability to replace a customer making declining purchaseswith a different major customer could have a material adverse effect on ourbusiness.

 

***Reduced demand for our products andservices may prevent us from achieving targeted revenue and profitability. ***Our revenue and ourability to achieve and sustain profitability depend on the overall demand forthe software products and services we offer. The general economic slowdown in the world economy may have causedpotential or existing customers to defer purchases of our products and servicesand otherwise alter their purchasing patterns. Capital spending in the information technology sector generally hasdecreased over the past two years and many of our customers and potentialcustomers have experienced declines in their revenues and operations.  The terrorist acts of September 11, 2001also have increased the current uncertainty in the economic environment, and wecannot predict the impact of these or similar events in the future, or of anyrelated or unrelated military action, on our customers or our business.  We believe that, in light of these concerns,some businesses may curtail or eliminate capital spending on informationtechnology.  In addition, we haveexperienced continued hesitancy on the part of our existing and potentialcustomers to commit to new products or services from us.  If U.S. or global economic conditionsworsen, this revenue impact may worsen as well and have a material adverseimpact on our business, operating results and financial condition.

 

***We rely for revenue on the telecommunications and financialservices industries, which are characterized by complexity and intensecompetition.*** Historically, we have been highly dependent upon the telecommunicationsindustry and more recently on the financial services market, and we arebecoming increasingly dependent upon the defense industry for sales of VDS andVersant enJin.  Our success in theseareas is dependent, to a large extent, on general economic conditions, ourability to compete with alternative technology providers and whether ourcustomers and potential customers believe we have the expertise and financialstability necessary to provide effective solutions in these markets.  If these conditions, among others, are notsatisfied, we may not be successful in generating additional opportunities inthese markets.  Currently, companies inthese markets are scaling back their technology expenditures and thetelecommunications industry has in particular experienced significant economicdifficulties and consolidation trends which could jeopardize our ability tocontinue to derive revenue from that. In addition, the types of applications and commercial products for thetelecommunications, financial services and defense markets are continuing todevelop and are rapidly changing, and these markets are characterized by anincreasing number of new entrants whose products may compete with ours.  As a result, we cannot predict the futuregrowth of these markets, and demand for object-oriented databases and real-timee-business applications in these markets may not develop or besustainable.  We also may not besuccessful in attaining a significant share of these markets due to competitionand other factors.  Moreover, potentialcustomers in these markets generally develop sophisticated and complexapplications that require substantial consulting expertise to implement andoptimize. This requires that we maintain a highly skilled consulting practicewith specific expertise in these markets. There can be no assurance that we canadequately hire and retain personnel for this practice.

 

***We depend on our international operations.***  A large portion of our revenue is derivedfrom customers located outside the United States.  This requires that we operate internationally and maintain asignificant presence in international markets. In addition, we also perform a significant amount of engineering work inIndia through our wholly owned subsidiary located in Pune, India.  Within our last fiscal year we havetransitioned some of our internationals sales efforts to a business model thatemploys local distributors. While use of local distributors reduces certain saleand operating expenses, it also makes our business more dependent on the skillsand efforts of third parties.

 

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Our international operations are subject to a numberof other risks.  These risks include:

 

•                  longerreceivable collection periods;

•                  changes inregulatory requirements;

•                  dependence onindependent resellers;

•                  multiple andconflicting regulations and technology standards;

•                  import andexport restrictions and tariffs;

•                  difficulties andcosts of staffing and managing foreign operations;

•                  potentiallyadverse tax consequences;

•                  foreign exchangerate fluctuations;

•                  the burdens ofcomplying with a variety of foreign laws;

•                  the impact ofbusiness cycles, economic and political instability and potential hostilitiesoutside the United States; and

•                  limited abilityto enforce agreements, intellectual property rights and other rights in someforeign countries.

 

In addition, in light of increasing global securityconcerns in the wake of the events of September 11, 2001, there may be additionalrisks of disruption to our international sales activities.  Any prolonged disruption in markets in whichwe derive significant revenue may potentially have an adverse impact on ourrevenues and results of operations.

 

***Our products have a lengthy sales cycle.***  Our sales cycle, which varies substantiallyfrom customer to customer, often exceeds nine months and can sometimes extendto a year or more, although sales to our e-business customers are oftenconcluded in shorter time intervals and sales to the defense industry can takeconsiderably longer.  Due in part to thestrategic nature of our products and associated expenditures, potentialcustomers are typically cautious in making product acquisition decisions.  While we believe that the sales cycle for real-timeproducts is shorter than for VDS, it may be that our initial sales of real-timeproducts may have even longer sales cycles as we strive to build credibilitywith new customers in different industries. The decision to license our products generally requires us to provide asignificant level of education to prospective customers regarding the uses andbenefits of our products, and we must frequently commit, without any charge orreimbursement, pre-sales support resources, such as assistance in performingbenchmarking and application prototype development.  Because of the lengthy sales cycle and the relatively largeaverage dollar size of individual licenses, a lost or delayed sale could have asignificant impact on our operating results for a particular period.

 

***We are focusing our growth efforts on our new real-timecomputing business, which presents certain new risks.*** With our acquisition of Mokume Software inNovember 2002 we have begun to develop a new “real-time” business strategy thatwe believe will enable us to expand our business by addressing newcustomers  in different industries withnew solutions.  We also hope toultimately develop additional real-time applications for our technology as partof this new business.  However thereal-time market is relatively new and our efforts to develop a real-timebusiness will require us to sell and market our products to manufacturingcompanies and companies in other new industries with which we have not hadprior sales or marketing experience.  We believe that success in developing and selling real-time businessproducts will require us to devote appropriate efforts to developing strongsales, marketing and development skills required to address new target markets.These efforts may increase our operating costs and if we fail to timelygenerate revenue from our real-time business our working capital and operatingresults could be adversely affected. There can be no assurance that our efforts to pursue the real-timecomputing business will be successful or will not adversely affect ourfinancial condition or results of operations, particularly in the near term.

 

***We are subject to litigation and the riskof future litigation***.We and certain of our present and former officers and directors were named as defendantsin four class action lawsuits filed in the United States District Court for theNorthern District of California on January 26, 1998, February 5, 1998, March11, 1998 and March 18, 1998. On June 19, 1998, a Consolidated Amended Complaintwas filed by the court-appointed lead Plaintiff.  After the court dismissed two amended complaints, plaintiffsfiled a Third Amended Complaint on May 10, 2001. The complaint allegedviolations of Sections 10(b) and 20(a) of the Securities Exchange Act, andSecurities and Exchange Commission Rule 10b-5 promulgated under the SecuritiesExchange Act, in connection with public statements about Versant and itsfinancial performance. On December 4, 2001, the court dismissed the ThirdAmended Complaint with prejudice due to Plaintiff’s failure to state a claim oftheir securities fraud action. On December 13, 2001, plaintiffs filed a noticeof appeal to the Ninth Circuit Court of Appeals. On May 2, 2002, theplaintiffs, now as appellants, filed an opening brief

 

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alleging the dismissal was in error and should bereversed. We filed our answering brief on July 12, 2002, and theappellant filed their reply brief on August 9, 2002. Oral arguments were heardon January 14, 2003 and on January 23, 2003the Court of Appeals affirmed the District Court’s dismissal.

 

***Risks Related toOur Industry***

 

***We face competition for both our VDS and Versant enJinproducts.* **For ourVDS products, we compete with companies offering object and relational databasemanagement systems. Object-oriented competitors include eXcelon (which wasacquired by Progress Software Corporation in 2002), Objectivity, Inc. and PoetSoftware Corporation.  Traditionalrelational database management competitors include Oracle, Computer Associates,Sybase, IBM and Microsoft.

 

In the e-business market our competitors can bedivided into two groups. First, we compete with relational database managementcompanies, many of which have modified or are expected to modify their relationaldatabase management systems to incorporate object-oriented interfaces and otherfunctionality and claim that this object-relational functionality is anadequate solution for integration with application servers. Second, we facecompetition from object-oriented companies such as eXcelon, PersistenceSoftware and TopLink that provide components similar to those included in ourVersant enJin product offering. In order for our products to be well acceptedin the e-business market, it is important for one or more of our technicalpartnerships with application server vendors such as IBM and BEA to becomedeeper and more extensive.

 

Many of our competitors, and especially Oracle andComputer Associates, have longer operating histories, significantly greaterfinancial, technical, marketing, service and other resources, significantlygreater name recognition, broader product offerings and a larger installed baseof customers than ours.  In addition,many of our competitors have well-established relationships with current andpotential customers of ours.  Ourcompetitors may be able to devote greater resources to the development,promotion and sale of their products, may have more direct access to corporatedecision-makers based on previous relationships and may be able to respond morequickly to new or emerging technologies and changes in customerrequirements.  We may not be able tocompete successfully against current or future competitors, and competitivepressures could have a material adverse effect on our business, operatingresults and financial condition.

 

***We depend on successful technology development.***  We believe that significant research anddevelopment expenditures will be necessary for us to remain competitive.  While we believe our research and developmentexpenditures will improve our product lines, because of the uncertainty ofsoftware development projects, these expenditures will not necessarily resultin successful product introductions. Uncertainties affecting the success of software development projectintroductions include technical difficulties, market conditions, competitiveproducts and consumer acceptance of new products and operating systems. Inparticular we expect that we will need to devote substantial effort to thedevelopment of new products in our real-time solutions division.

 

We also face certain challenges in integratingthird-party technology with our products. These challenges include the technological challenges of integration,which may result in development delays, and uncertainty regarding the economicterms of our relationship with the third-party technology providers, which mayresult in delays of the commercial release of new products.

 

We have developed technology that will allow Versant enJin to supportBEA WebLogic, IBM WebSphere and other J2EE-based application servers; however,undiscovered bugs or errors may exist that prevent us from achieving thefunctionality we seek with these integrations. In addition, because Java Bean containers are specific to each applicationserver vendor and no standards have been adopted for these containers, we maynot be able to take advantage of our existing development work when propagatingour solution for other application server vendors.

 

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Our future success will depend in part on our abilityto integrate our products with those of vendors providing complementaryproducts.  Versant enJin and VDS must beintegrated with compilers, development tools, operating systems, and other softwareand hardware components to produce a complete end user solution.  We may not receive the support of thesethird-party vendors, some of which may compete with us, in integrating ourproducts with their products.

 

***We must protect our intellectual property.*** Despite our efforts to protect ourproprietary rights, unauthorized parties may attempt to copy aspects of ourproducts, obtain or use information that we regard as proprietary or use ormake copies of our products in violation of license agreements.  Policing unauthorized use of our products isdifficult and potentially expensive.  Inaddition, the laws of many jurisdictions do not protect our proprietary rightsto as great an extent as do the laws of the United States.  Shrink-wrap licenses may be wholly orpartially unenforceable under the laws of certain jurisdictions, and copyrightand trade secret protection for software may be unavailable in certain foreigncountries.  Our means of protecting ourproprietary rights may not be adequate, and our competitors may independentlydevelop similar technology.

 

To date, we have not been notified that our productsinfringe the proprietary rights of other parties, but other parties could claimthat our current or future products infringe these rights.  We expect that developers of object-orientedtechnology will increasingly be subject to infringement claims as the number ofproducts, competitors and patents in our industry segment grows.  Any claim of this type, whether meritoriousor not, could be time-consuming, result in costly litigation, cause productshipment delays and require us to enter into royalty or licensingagreements.  Royalty or licensingagreements might not be available on terms acceptable to us or at all, whichcould have a material adverse effect upon our business, operating results andfinancial condition.

 

***We depend on our personnel, for whom competition isintense. ***Ourfuture performance depends in significant part upon the continued service ofour key technical, sales and senior management personnel.  The loss of the services of one or more ofour key employees could have a material adverse effect on our business.  Our future success also depends on our continuingability to attract, train and motivate highly qualified technical, sales andmanagerial personnel. Our current financial position may make it more difficultto attract and retain highly talented individuals due to constraints on ourability to offer compensation at levels that may be offered by largercompetitors.

 

***Risks Related to our Stock***

 

***The listing of our common stock wasrecently transferred from the Nasdaq National Market System to the NasdaqSmallCap Market. ***Wedo not currently meet the listing requirements necessary for our common stockto be listed on the Nasdaq National Market System, or NMS.  This is due to several reasons, includingbut not limited to the fact that (i) for more than 30 consecutive trading daysthe bid price of our common stock was less than $1.00 per share, and (ii) ournet tangible assets and stockholders’ equity are below the NMS’ minimumrequired amounts.  Consequently,effective on October 1, 2002, we transferred the listing of our common stockfrom the NMS to the Nasdaq SmallCap Market. The listing of our common stock on the Nasdaq SmallCap Market may beperceived as a negative by investors and may adversely affect the liquidity andtrading price of our common stock. We may be unable to re-list our common stockon the NMS.

 

***In order for our common stock to continue to be listed onthe Nasdaq SmallCap Market, we must satisfy the Nasdaq SmallCap listingrequirements, and there can be no assurance that we will be able to do so. ***In order for ourcommon stock to continue to be listed for trading on the Nasdaq SmallCapMarket, we must continue to satisfy the listing requirements of the NasdaqSmallCap Market.  Although the continuedlisting requirements of the Nasdaq SmallCap Market are not as demanding asthose of the NMS, they do, among other things, require that our stock have aminimum bid price of $1.00 per share and that we either (i) havestockholders’ equity of $2,500,000, or (ii) have $500,000 in net income or(iii) that the market value of our publicly held shares be $35 million ormore.  For several reasons including thefact that the bid price of our common stock has been below $1.00 per share fora significant time period, there is a significant risk that our common stockwill cease to qualify for listing on the Nasdaq SmallCap Market.  Ifour common stock is delisted from trading on the Nasdaq SmallCap Market, thenthe trading market for our common stock, and the ability of our stockholders totrade our shares and obtain liquidity and fair market prices for their Versantshares may be significantly impaired and the market price of Versant’s commonstock may decline significantly.

 

***Our stock price is volatile.***  Our revenue, operating results and stockprice have been and may continue to be subject to significant volatility,particularly on a quarterly basis.  Wehave previously experienced revenue and earnings results that weresignificantly below levels expected by securities analysts and investors, whichhave had an immediate and significant adverse effect on the trading price ofour common stock.  This may occur againin the future.  Additionally, as asignificant portion of our revenue often occurs late in the quarter, we may notlearn of revenue shortfalls until late in the quarter, which, when announced,could result in an even more immediate and adverse effect on the trading priceof our common stock.

 

***Ownership of our stock isconcentrated. ***Asa result of the Vertex note conversion and equity financing in July 1999,ownership of our equity has become more concentrated.  Based on Vertex’s filings with the SEC, which indicate that Vertexholds the equivalent of 4,027,034 shares (assuming conversion of all theirpreferred shares and exercise of all their warrants), and assuming that Versanthas 18,264,235 shares outstanding (which amount consists of all outstandingshares of our common stock as of January 21, 2003, plus shares resulting fromthe conversion of all preferred shares and the exercise of all warrants held byVertex), Vertex and its affiliates would beneficially own approximately 22% ofour common stock.

 

***The holders of our preferred stock have asubstantial liquidation preference over the holders of our common stock.***  The outstanding shares of our preferredstock held by Vertex and other preferred stockholders currently are entitled toa liquidation preference of approximately $14 million.  This means that, in the event of anacquisition of Versant, our preferred shareholders would be entitled to receiveapproximately the first $14 million of acquisition proceeds before holders ofcommon stock would be entitled to receive any proceeds of the acquisitiontransaction.

 

 

32

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***We may desire to raise additional funds through debt orequity financings, which would dilute the ownership of our existingstockholders and possibly subordinate certain of their rights to rights of newinvestors***.   Wemay choose to raise additional funds in debt or equity financings if they areavailable to us on terms we believe reasonable to increase our working capital,strengthen our financial position or to make acquisitions. Any sales ofadditional equity or convertible debt securities would result in dilution ofthe equity interests of our existing shareholders, which could besubstantial.  Additionally, if we issueshares of preferred stock or convertible debt to raise funds, the holders ofthose securities might be entitled to various preferential rights over theholders of our common stock, including repayment of their investment, andpossibly additional amounts, before any payments could be made to holders ofour common stock in connection with an acquisition of the company.  Such preferred shares, if authorized, mightbe granted rights and preferences that would be senior to, or otherwiseadversely affect, the rights and the value of Versant’s common stock.  Also, new investors may require that weenter into voting arrangements that give them additional voting control orrepresentation on our board of directors.

 

**Item7a: Quantitative and Qualitative Disclosures About Market Risk**

 

***Foreign currency hedging instruments. ***We transact businessin various foreign currencies and, accordingly, we are subject to exposure fromadverse movements in foreign currency exchange rates.  To date, the effect of changes in foreign currency exchange rateson revenue and operating expenses has not been material.  Operating expenses incurred by our foreignsubsidiaries are denominated primarily in local currencies.  We currently do not use financial instrumentsto hedge these operating expenses.  *Weintend to assess the need to utilize financial instruments to hedge currencyexposures on an ongoing basis.

 

We do not use derivative financial instruments forspeculative trading purposes.

 

***Interest rate risk.* **Our cash equivalents primarily consistof money market accounts, accordingly, our interest rate risk is de minimus.

 

33

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**Item8.  Financial Statements andSupplementary Data.**

 

**REPORTOF INDEPENDENT AUDITORS**

 

The Board of Directors and ShareholdersVersant Corporation:

 

We have audited theaccompanying consolidated balance sheet of Versant Corporation and subsidiariesas of October 31, 2002, and the related consolidated statements of operations,shareholders’ equity, and cash flows for the year then ended.  In connection with our audit of theconsolidated financial statements, we also have audited the related financialstatement schedule listed in Item 15(a)2. These consolidated financial statements and the related financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements and the related financial statementschedule based on our audit.  The accompanyingconsolidated balance sheet of Versant Corporation and subsidiaries as ofOctober 31, 2001 and the related consolidated statements of operations,shareholders’ equity, and cash flows for the ten-month period ended October 31,2001 and for the year ended December 31, 2000 were audited by other auditorswho have ceased operations.  Thoseauditors expressed an unqualified opinion on those consolidated financialstatements and the related financial statement schedule in their report datedDecember 12, 2001.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Versant Corporation andsubsidiaries as of October 31, 2002, and the results of their operations andtheir cash flows for the year then ended in conformity with accountingprinciples generally accepted in the United States of America.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as whole, present fairly, in all material respects,the information set forth therein.

 

/s/ KPMG LLP

 

Mountain View, CaliforniaNovember 26, 2002

 

34

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*Note:  This is a copy of a report previously issued by Arthur AndersenLLP, our former independent accountants. This report has not been reissued by Arthur Andersen LLP in connectionwith the filing of this Annual Report on Form 10-K.*

 

 

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To the Board of Directors and Shareholders of Versant Corporation:

 

We have audited the accompanying consolidated balance sheet of VersantCorporation (a California corporation) and its subsidiaries (the Company) as ofOctober 31, 2001 and the related consolidated statements of operations,shareholders’ equity and cash flows for the period from January 1, 2001 toOctober 31, 2001 and for the year ended December 31, 2000.  These consolidated financial statements andthe schedule referred to below are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements and Schedule II based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in theconsolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of VersantCorporation and its subsidiaries****as of October 31, 2001  and the results of their operations andtheir cash flows for the period from January 1, 2001 to October 31, 2001 andfor the year ended December 31, 2000, in conformity with accounting principlesgenerally accepted in the United States.

 

Our audits were made for the purpose of forming an opinion on the basicconsolidated financial statements taken as a whole. The schedule listed underSchedule II is presented for the purpose of complying with the Securities andExchange Commission’s rules and is not a part of the basic consolidatedfinancial statements. This schedule has been subjected to the auditingprocedures applied in our audits of the basic consolidated financial statementsand, in our opinion, fairly states in all material respects the financial datarequired to be set forth therein in relation to the basic consolidatedfinancial statements taken as a whole.

 
|   | /s/ ARTHUR ANDERSEN LLP |   |
|--------|-------------------------|--------|

 

San Jose, California

December 12, 2001

 

35

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**VERSANT CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(In thousands)

 
|                                                                                                                                                                  |   | **October  31,  2002** |       | **October  31,  2001** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                            |   |                   | ** ** |                   | ** ** |
|                                                                                                                                                                  |   |                   |       |                   |       |
| Current assets:                                                                                                                                                       |   |                   |       |                   |       |
| Cash and cash  equivalents                                                                                                                                            |   | $                      | 4,427      |                   | $          | 4,101 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $687 and $482 at  October 31, 2002 and October 31, 2001, respectively                                 |   | 3,997                  |       | 6,478                  |       |
| Inventory                                                                                                                                                             |   | 882                    |       | —                 |       |
| Other current  assets                                                                                                                                                 |   | 464                    |       | 1,256                  |       |
| Total current  assets                                                                                                                                                 |   | 9,770                  |       | 11,835                 |       |
|                                                                                                                                                                  |   |                   |       |                   |       |
| Property and  equipment, net                                                                                                                                          |   | 1,890                  |       | 3,093                  |       |
| Other assets                                                                                                                                                          |   | 21                     |       | —                 |       |
| Goodwill, net of  accumulated amortization of $3,184 and   $3,796 at October 31, 2002 and October 31, 2001, respectively                                         |   | 240                    |       | 442                    |       |
|                                                                                                                                                                  |   |                   |       |                   |       |
|                                                                                                                                                                  |   | $                      | 11,921     |                   | $          | 15,370 |   |
|                                                                                                                                                                  |   |                   |       |                   |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                        |   |                   |       |                   |       |
|                                                                                                                                                                  |   |                   |       |                   |       |
| Current  liabilities:                                                                                                                                                 |   |                   |       |                   |       |
| Current portion  of capital lease obligations                                                                                                                         |   | $                      | 4          |                   | $          | 57 |   |
| Short-term debt                                                                                                                                                       |   | —                 |       | 550                    |       |
| Accounts payable                                                                                                                                                      |   | 1,292                  |       | 1,239                  |       |
| Accrued  liabilities                                                                                                                                                  |   | 3,064                  |       | 2,574                  |       |
| Current portion  of deferred revenue                                                                                                                                  |   | 3,054                  |       | 3,748                  |       |
| Current portion  of deferred rent                                                                                                                                     |   | 30                     |       | 3                      |       |
| Total current  liabilities                                                                                                                                            |   | 7,444                  |       | 8,171                  |       |
|                                                                                                                                                                  |   |                   |       |                   |       |
| Long-term  liabilities, net of current portion:                                                                                                                       |   |                   |       |                   |       |
| Long-term  portion of capital lease obligations                                                                                                                       |   | —                 |       | 3                      |       |
| Long-term  portion of deferred revenue                                                                                                                                |   | 529                    |       | 234                    |       |
| Long-term  portion of deferred rent                                                                                                                                   |   | 372                    |       | 397                    |       |
| Total long-term  liabilities                                                                                                                                          |   | 901                    |       | 634                    |       |
| Commitments and  contingencies (Notes 4 and10)                                                                                                                        |   |                   |       |                   |       |
|                                                                                                                                                                  |   |                   |       |                   |       |
| Shareholders’  equity:                                                                                                                                           |   |                   |       |                   |       |
| Convertible  preferred stock, no par value  Authorized - 3,000 shares  Issued and outstanding — 1,314 in   2002 and 2001  Liquidation preference of $13,991 |   | 4,912                  |       | 4,912                  |       |
| Common stock, no  par value  Authorized - 30,000 shares  Issued and outstanding — 12,376 and 12,131 at October 31, 2002 and October  31, 2001, respectively      |   | 52,790                 |       | 52,465                 |       |
| Accumulated  deficit                                                                                                                                                  |   | (54,319                | )          | (50,929                | )          |
| Accumulated  other comprehensive income                                                                                                                               |   | 193                    |       | 117                    |       |
| Total  shareholders’ equity                                                                                                                                      |   | 3,576                  |       | 6,565                  |       |
|                                                                                                                                                                  |   | $                      | 11,921     |                   | $          | 15,370 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**VERSANTCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands, except pershare amounts)

 
|                                                    |   | **Year  Ended  October 31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   | **Year  Ended  December 31,  2000** |   |
|---------------------------------------------------------|--------|------------------------------------|--------|------------------------------------------|--------|-------------------------------------|--------|
|                                                    |   |                               |   |                                     |   |                                |   |
| Revenue:                                                |   |                               |   |                                     |   |                                |   |
| License                                                 |   | $                                  | 10,106 |                                     | $      | 7,362                               |   | $ | 18,859 |   |
| Services                                                |   | 9,850                              |   | 16,547                                   |   | 9,586                               |   |
| Total revenue                                           |   | 19,956                             |   | 23,909                                   |   | 28,445                              |   |
|                                                    |   |                               |   |                                     |   |                                |   |
| Cost of revenue:                                        |   |                               |   |                                     |   |                                |   |
| License                                                 |   | 1,198                              |   | 936                                      |   | 817                                 |   |
| Services                                                |   | 5,332                              |   | 11,737                                   |   | 5,499                               |   |
| Total cost of  revenue                                  |   | 6,530                              |   | 12,673                                   |   | 6,316                               |   |
|                                                    |   |                               |   |                                     |   |                                |   |
| Gross profit                                            |   | 13,426                             |   | 11,236                                   |   | 22,129                              |   |
|                                                    |   |                               |   |                                     |   |                                |   |
| Operating  expenses:                                    |   |                               |   |                                     |   |                                |   |
| Marketing and  sales                                    |   | 7,854                              |   | 8,504                                    |   | 10,304                              |   |
| Research and  development                               |   | 5,835                              |   | 5,464                                    |   | 5,866                               |   |
| General and  administrative                             |   | 3,144                              |   | 2,661                                    |   | 3,305                               |   |
| Amortization of  goodwill                               |   | 202                                |   | 396                                      |   | 502                                 |   |
| Write down of  goodwill                                 |   | —                             |   | 555                                      |   | —                              |   |
| Restructuring  costs                                    |   | —                             |   | 668                                      |   | —                              |   |
| Total operating  expenses                               |   | 17,035                             |   | 18,248                                   |   | 19,977                              |   |
|                                                    |   |                               |   |                                     |   |                                |   |
| Income (loss)  from operations                          |   | (3,609                             | )      | (7,012                                   | )      | 2,152                               |   |
|                                                    |   |                               |   |                                     |   |                                |   |
| Other income  (expense):                                |   |                               |   |                                     |   |                                |   |
| Foreign currency  transaction gain (loss)               |   | (49                                | )      | (118                                     | )      | (239                                | )      |
| Interest expense                                        |   | (2                                 | )      | (22                                      | )      | (127                                | )      |
| Interest and  other income, net                         |   | 338                                |   | 87                                       |   | 144                                 |   |
| Total other  expense                                    |   | 287                                |   | (53                                      | )      | (222                                | )      |
|                                                    |   |                               |   |                                     |   |                                |   |
| Income (loss)  before taxes                             |   | (3,322                             | )      | (7,065                                   | )      | 1,930                               |   |
| Provision for  income taxes                             |   | 68                                 |   | 93                                       |   | 74                                  |   |
| Net income  (loss)                                      |   | $                                  | (3,390 | )                                        | $      | (7,158                              | )      | $ | 1,856 |   |
|                                                    |   |                               |   |                                     |   |                                |   |
| Net income  (loss) per share:                           |   |                               |   |                                     |   |                                |   |
| Basic                                                   |   | $                                  | (0.28  | )                                        | $      | (0.59                               | )      | $ | 0.16 |   |
| Diluted                                                 |   | $                                  | (0.28  | )                                        | $      | (0.59                               | )      | $ | 0.12 |   |
|                                                    |   |                               |   |                                     |   |                                |   |
| Weighted average  shares used in per share calculations |   |                               |   |                                     |   |                                |   |
| Basic                                                   |   | 12,267                             |   | 12,041                                   |   | 11,369                              |   |
| Diluted                                                 |   | 12,267                             |   | 12,041                                   |   | 15,333                              |   |

 

See accompanying notes toconsolidated financial statements.

 

37

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**VERSANT CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

(In thousands, except share amounts)

 

 
|                                                                                               |   | **Convertible  Preferred** |   | **Common** |   |       |       |       |   |                     |    |                                        |    |
|----------------------------------------------------------------------------------------------------|--------|----------------------------|--------|------------|--------|------------|------------|------------|--------|--------------------------|---------|---------------------------------------------|---------|
|                                                                                               |   | **Shares**                 |   | **Amount** |   | **Shares** |       | **Amount** |   | **Accumulated  Deficit** |    | **Accumulated  Other Comprehensive Income** |    | **Total  Shareholders’ Equity** |   | **Total  Comprehensive Income (loss)** |   |
|                                                                                               |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   |   |   |
|                                                                                               |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   |   |   |
|                                                                                               |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   |   |   |
| **Balance  at December 31, 1999**                                                                  |   | 1,489,799                  |   | $          | 5,662  |       | 10,560,933 |       | $      | 48,528                   |    | $                                           | (45,627 | ) | $ | 25 |   | $ | 8,588 |   |   |   |
|                                                                                               |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   |   |   |
| ESPP and  exercises of stock options                                                               |   | —                     |   | —     |   | 812,207    |       | 2,352      |   | —                   |    |                                        |    | 2,352 |   |   |   |
| Exercises of  warrants                                                                             |   | —                     |   | —     |   | 158,450    |       | 338        |   | —                   |    |                                        |    | 338 |   |   |   |
| Conversion of  preferred stock to common stock                                                     |   | (176,056                   | )      | (750       | )      | 352,112    |       | 750        |   | —                   |    |                                        |    | — |   |   |   |
| Net income                                                                                         |   | —                     |   | —     |   | —     |       | —     |   | 1,856                    |    |                                        |    | 1,856 |   | $ | 1,856 |   |
| Other  comprehensive income, net of tax:                                                           |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   |   |   |
| Foreign currency  translation adjustments                                                          |   | —                     |   | —     |   | —     |       | —     |   | —                   |    | 87                                          |    | 87 |   | 87 |   |
| Total  comprehensive income                                                                        |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   | 1,943 |   |
| **Balance  at December 31, 2000**                                                                  |   | 1,313,743                  |   | 4,912      |   | 11,883,702 |       | 51,968     |   | (43,771                  | )       | 112                                         |    | 13,221 |   |   |   |
|                                                                                               |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   |   |   |
| ESPP and  exercises of stock options                                                               |   | —                     |   | —     |   | 247,651    |       | 476        |   | —                   |    |                                        |    | 476 |   |   |   |
| Non-cash  compensation cost associated with the issuance of common shares for  consulting services |   | —                     |   | —     |   | —     |       | 22         |   | —                   |    |                                        |    | 22 |   |   |   |
| Repurchase of  common shares                                                                       |   | —                     |   | —     |   | (550       | )          | (1         | )      | —                   |    |                                        |    | (1 | ) |   |   |
| Net loss                                                                                           |   | —                     |   | —     |   | —     |       | —     |   | (7,158                   | )       |                                        |    | (7,158 | ) | (7,158 | ) |
| Other  comprehensive income, net of tax:                                                           |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   |   |   |
| Foreign currency  translation adjustments                                                          |   | —                     |   | —     |   | —     |       | —     |   |                     |    | 5                                           |    | 5 |   | 5 |   |
| Total  comprehensive loss                                                                          |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   | (7,153 | ) |
| **Balance  at October 31, 2001**                                                                   |   | 1,313,743                  |   | 4,912      |   | 12,130,803 |       | 52,465     |   | $                        | (50,929 | )                                           | 117     |   | 6,565 |   |   |   |
|                                                                                               |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   |   |   |
| ESPP and  exercises of stock options                                                               |   | —                     |   | —     |   | 245,512    |       | 325        |   | —                   |    |                                        |    | 325 |   |   |   |
| Net loss                                                                                           |   | —                     |   | —     |   | —     |       | —     |   | (3,390                   | )       |                                        |    | (3,390 | ) | (3,390 | ) |
| Other comprehensive  income, net of tax:                                                           |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   |   |   |
| Foreign currency  translation adjustments                                                          |   | —                     |   | —     |   | —     |       | —     |   |                     |    | 76                                          |    | 76 |   | 76 |   |
| Total  comprehensive loss                                                                          |   |                       |   |       |   |       |       |       |   |                     |    |                                        |    |   |   | $ | (3,314 | ) |
| **Balance  at October 31, 2002**                                                                   |   | 1,313,743                  |   | $          | 4,912  |       | 12,376,315 |       | $      | 52,790                   |    | $                                           | (54,319 | ) | $ | 193 |   | $ | 3,576 |   |   |   |

 

See accompanying notes toconsolidated financial statements.

 

38

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**VERSANT CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                                  |   | **Year Ended  October 31,  2002** |    | **Ten Months  Ended October 31,  2001** |   | **Year Ended  December 31,  2000** |   |
|---------------------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------------|--------|------------------------------------|--------|
|                                                                                  |   |                              |    |                                    |   |                               |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                            |   |                              |    |                                    |   |                               |   |
| Net income  (loss)                                                                    |   | $                                 | (3,390  | )                                       | $      | (7,158                             | )      | $ | 1,856 |   |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |   |                              |    |                                    |   |                               |   |
| Non-cash portion  of restructuring costs                                              |   | —                            |    | 108                                     |   | —                             |   |
| Depreciation and  amortization                                                        |   | 1,333                             |    | 1,561                                   |   | 2,364                              |   |
| Write-down of  goodwill                                                               |   | —                            |    | 555                                     |   | —                             |   |
| Non-cash  compensation expense                                                        |   | —                            |    | 22                                      |   | —                             |   |
| Write off fixed  assets                                                               |   | 50                                |    | —                                  |   | —                             |   |
| Provision for  doubtful accounts receivable                                           |   | 296                               |    | 302                                     |   | 421                                |   |
| Changes in  current assets and liabilities, net of acquisitions:                      |   |                              |    |                                    |   |                               |   |
| Accounts  receivable                                                                  |   | 2,185                             |    | 4,780                                   |   | (4,705                             | )      |
| Other current  assets                                                                 |   | (90                               | )       | (207                                    | )      | (338                               | )      |
| Other assets                                                                          |   | (21                               | )       | 21                                      |   | 169                                |   |
| Accounts payable                                                                      |   | 53                                |    | 551                                     |   | (30                                | )      |
| Accrued  liabilities                                                                  |   | 490                               |    | (676                                    | )      | (152                               | )      |
| Deferred revenue                                                                      |   | 2                                 |    | 437                                     |   | 340                                |   |
| Deferred rent                                                                         |   | (399                              | )       | 29                                      |   | 63                                 |   |
| Net cash  provided by (used in) operating activities                                  |   | 509                               |    | 325                                     |   | (12                                | )      |
|                                                                                  |   |                              |    |                                    |   |                               |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                            |   |                              |    |                                    |   |                               |   |
| Purchase of  property and equipment                                                   |   | (3                                | )  | (171                                    | )      | (555                               | )      |
| Proceeds from  sale of property and equipment                                         |   | 25                                |    | —                                  |   | —                             |   |
| Net cash  provided by (used in) investing activities                                  |   | 22                                |    | (171                                    | )      | (555                               | )      |
|                                                                                  |   |                              |    |                                    |   |                               |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                            |   |                              |    |                                    |   |                               |   |
| Proceeds from  sale of common stock, net                                              |   | 325                               |    | 476                                     |   | 2,352                              |   |
| Repurchase of  common shares                                                          |   | —                            |    | (1                                      | )      | —                             |   |
| Proceeds from  exercise of warrants                                                   |   | —                            |    | —                                  |   | 338                                |   |
| Net borrowings  (payments) under short-term note and bank loan                        |   | (550                              | )       | (770                                    | )      | (1,316                             | )      |
| Principal  payments under capital lease obligations                                   |   | (56                               | )       | (43                                     | )      | (277                               | )      |
| Net cash  provided by  (used in) financing  activities                           |   | (281                              | )       | (338                                    | )      | 1,097                              |   |
|                                                                                  |   |                              |    |                                    |   |                               |   |
| EFFECTS OF  EXCHANGE RATE CHANGES                                                     |   | 76                                |    | 5                                       |   | 87                                 |   |
|                                                                                  |   |                              |    |                                    |   |                               |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                 |   | 326                               |    | (179                                    | )      | 617                                |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                     |   | 4,101                             |    | 4,280                                   |   | 3,663                              |   |
| **CASH AND CASH EQUIVALENTS AT END OF  PERIOD**                                       |   | $                                 | 4,427   |                                    | $      | 4,101                              |   | $ | 4,280 |   |
|                                                                                  |   |                              |    |                                    |   |                               |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                                    |   |                              |    |                                    |   |                               |   |
| Cash paid for:                                                                        |   |                              |    |                                    |   |                               |   |
| Interest                                                                              |   | $                                 | 1       |                                    | $      | 22                                 |   | $ | 137 |   |
| Foreign  withholding and state income taxes                                           |   | 62                                |    | 74                                      |   | 47                                 |   |
|                                                                                  |   |                              |    |                                    |   |                               |   |
| SUPPLEMENTAL  SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES                  |   |                              |    |                                    |   |                               |   |
| Capital lease  obligations incurred for acquisition of equipment                      |   | $                                 | —  |                                    | $      | 12                                 |   | $ | — |   |
| Issuance of  common shares for consulting services                                    |   | —                            |    | 22                                      |   | —                             |   |
| Conversion of  Series A Preferred Stock to shares of common stock                     |   | —                            |    | —                                  |   | 750                                |   |

 

See accompanying notes toconsolidated financial statements.

 

39

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**VERSANT CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**October 31, 2002**

 

**1.        Organization, Operations and Liquidity**

 

Versant Corporation was incorporated in California inAugust 1988.  References to the“Company” in these Notes to Consolidated Financial Statements refer to VersantCorporation and its subsidiaries.  TheCompany operates in a single industry segment and is involved in the design,development, marketing and support of high performance object databasemanagement software systems.

 

The Company is subject to the risks associated withother companies in a comparable stage of development. These risks include, butare not limited to, fluctuations in operating results, seasonality, a lengthysales cycle, dependence on the acceptance of object database technology,competition, a limited customer base, dependence on key individuals, dependenceon international operations, foreign currency fluctuations, productconcentration, and the ability to adequately finance its ongoing operations.

 

As of October 31, 2002, the Company had not achievedbusiness volume sufficient to restore profitability and positive cash flowconsistently, on an annual basis.  TheCompany operated at a net loss of $3.4 million in 2002, net loss of $7.2million in the ten months ended October 31, 2001 and net income of $1.9 millionin 2000.  Management anticipates fundingfuture operations and repaying its debt obligations from current cash resourcesand future cash flows from operations. If financial results fall short of projections, additional debt orequity may be required and the Company may need to implement further costcontrols.  No assurances can be giventhat these efforts will be successful, if required.

 

On September 10, 2001, theCompany filed Form 8-K reporting a decision by the Board of Directors to changethe Company’s fiscal year-end from December 31 to October 31. This change wasmade to better align the Company’s customers’ procurement cycle and theCompany’s financial reporting cycles. As a result of this change, the Companyhas a ten-month transition period for the ten months ended October 2001.  The Company’s new fiscal year 2002 commencedon November 1, 2001.

 

**2.        Restructuring Costs**

 

On October 31, 2001, the Company implemented arestructuring plan aimed at optimizing performance in Europe.  The primary goal was to reduce operatingexpenses, while maintaining current revenue streams in Europe. As a result, theCompany changed its distribution in France from a wholly owned subsidiary to anindependent distributor.  The Companyincurred one-time costs related to employee severance payments, related benefitand outplacement expenses, termination of the building lease and accounting andlegal costs associated with the closure of the office and the write-off of thecarrying value of fixed assets. The total cost of the restructuring wasestimated at $668,000 and was recorded as restructuring costs in operatingexpenses in the ten months ended October 31, 2001.  Remaining obligations are expected to be paid by April 30, 2003.

 

The following table summarizes the Company’srestructuring activity at October 31, 2002:

 

| **Restructuring Costs**                            |   | **Balance at  Oct 31, 2001** |    | **FY 2002  Usage** |   | **Balance at  October 31,  2002** |   |
|----------------------------------------------------|--------|------------------------------|---------|--------------------|--------|-----------------------------------|--------|
| Employee  severance and related costs              |   | $                            | 290,000 |               | $      | (290,000                          | )      | $ | — |   |
| Lease  termination and building costs              |   | 160,000                      |    | (160,000           | )      | —                            |   |
| Professional  fees                                 |   | 110,000                      |    | (101,454           | )      | 8,546                             |   |
| Write-off of  fixed assets                         |   | 62,000                       |    | (62,000            | )      | —                            |   |
| Write-off of  other current assets and liabilities |   | 46,000                       |    | (46,000            | )      | —                            |   |
| Total  restructuring                               |   | $                            | 668,000 |               | $      | (659,454                          | )      | $ | 8,546 |   |

 

40

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**3.        Summary of Significant AccountingPolicies**

 

Principles of Consolidation

 

The consolidated financial statements include theaccounts of the Company and its subsidiaries located in the United Kingdom,France, Germany, and India.  Allsignificant intercompany balances and transactions are eliminated inconsolidation.

 

Reclassifications

 

Certain reclassifications have been made to amounts inprior years to conform to the 2002 presentation in accordance with EITF 01-14(see Note 4).

 

Use of Estimates

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

Fair Value of Financial Instruments

 

At October 31, 2002 and October 31, 2001, the carryingvalues of cash, accounts receivable, accounts payable and accrued liabilitiesapproximated fair values since they were short-term in nature. Debtapproximated fair value as it was short-term in nature or had stated interestrates based on current market rates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid cashinvestments with an original maturity of three months or less to be cashequivalents.   Cash and cash equivalentsconsist of checking and money market accounts.

 

Inventory

 

Inventory is carried at the lower of average cost ormarket and consists of third-party software held for resale.

 

Property and Equipment

 

Property and equipment, at cost, consisted of thefollowing (in thousands):

 

|                                                 |   | **October  31, 2002** |   | **October  31, 2001** |   |
|------------------------------------------------------|--------|-----------------------|--------|-----------------------|--------|
| Computer  equipment                                  |   | $                     | 3,831  |                  | $      | 6,436 |   |
| Furniture and  fixtures                              |   | 1,885                 |   | 1,941                 |   |
| Software                                             |   | 664                   |   | 735                   |   |
| Leasehold  improvements                              |   | 1,178                 |   | 1,184                 |   |
|                                                 |   | 7,558                 |   | 10,296                |   |
| Less—accumulated  depreciation and amortization |   | (5,668                | )      | (7,203                | )      |
|                                                 |   | $                     | 1,890  |                  | $      | 3,093 |   |

 

41

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The Company had capitallease agreements for equipment with an original cost of  $11,500 at October 31, 2002 and $283,501 atOctober 31, 2001.  Accumulateddepreciation of leased equipment was $9,104 as of October 31, 2002 and $225,488at October 31, 2001.

 

Property and equipment are depreciated on astraight-line basis over the estimated useful lives of the assets ranging fromtwo to seven years. Leased assets and leasehold improvements are amortized overthe shorter of the estimated useful lives or the term of the lease.

 

Goodwill

 

The Company has allocated goodwill at the enterpriselevel and periodically evaluates whether events and circumstances have occurredthat indicate the remaining goodwill may not be recoverable. When factorsindicate that goodwill should be evaluated for possible impairment, the Companywill use an estimate of undiscounted future net cash flows of the asset todetermine if the impairment has occurred. An impairment in the carrying value of an asset is assessed when theundiscounted, expected future operating cash flows to be derived from the assetare less than its carrying value.  Ifthe Company determines goodwill has been impaired, the impairment is recordedbased on the excess of the carrying value of the goodwill over its fair value.  

 

Software Development Costs

 

Under Statement of Financial Accounting Standards(SFAS) No. 86, “Accounting for the Costs of Computer Software to be Sold,Leased or Otherwise Marketed,” costs incurred in the research and developmentof software products are expensed as incurred until technological feasibilityhas been established.  Once established,these costs would be capitalized.  Theestablishment of technological feasibility and the ongoing assessment of therecoverability of these costs requires considerable judgment by management withrespect to certain external factors, including, but not limited to, anticipatedfuture gross product revenues, estimated economic life and changes in softwareand hardware technologies.  Amounts thatcould have been capitalized under SFAS No. 86 were insignificant and,therefore, no costs have been capitalized to date.

 

Accrued Liabilities

 

Accrued liabilities consisted of the following (inthousands):

 

|                 |   | **October  31, 2002** |   | **October  31, 2001** |   |
|----------------------|--------|-----------------------|--------|-----------------------|--------|
| Payroll and  related |   | $                     | 786    |                  | $      | 1,090 |   |
| Customer  deposits   |   | 1,255                 |   | —                |   |
| Taxes payable        |   | 293                   |   | 471                   |   |
| Other                |   | 730                   |   | 1,013                 |   |
| Total                |   | $                     | 3,064  |                  | $      | 2,574 |   |

 

Deferred Revenue

 

Deferred revenue represents amounts received from customers underlicense and maintenance agreements that the Company is not yet entitled torecognize as revenue because the earnings process has not been completed.

 

Deferred revenue consisted of the following (in thousands):

 

42

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|                     |   | **October  31, 2002** |   | **October  31, 2001** |   |
|--------------------------|--------|-----------------------|--------|-----------------------|--------|
| Maintenance              |   | $                     | 2,914  |                  | $      | 2,860 |   |
| Training and  consulting |   | 36                    |   | 102                   |   |
| License                  |   | 633                   |   | 1,020                 |   |
| Total                    |   | $                     | 3,583  |                  | $      | 3,982 |   |

 

Foreign Currency Translation

 

The functional currency of the Company’s subsidiariesis the local currency.  Accordingly, allassets and liabilities are translated into U.S. dollars at the current exchangerate as of the applicable balance sheet date. Revenues and expenses are translated at the average exchange rateprevailing during the period.  Gains andlosses resulting from the translation of the financial statements are includedin accumulated other comprehensive income (loss) in the accompanyingconsolidated statements of shareholders’ equity.  Currently, the Company does not employ a foreign currency hedgeprogram utilizing foreign currency exchange contracts as the foreign currencytransactions, and risks to date have not been significant. Foreign currencytransaction gains and losses are reported in results of operations in theperiod in which they occur.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with theprovisions of Statement of Position (SOP) 97-2, “Software Revenue Recognition”and SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, WithRespect to Certain Transactions”.  Revenue consists mainly of revenue earned under software licenseagreements, maintenance agreements and for consulting and training activities.

 

The Company licenses its products to end-users,value-added resellers and distributors through two types of perpetual licenses—developmentlicenses and deployment licenses. Development licenses are typically sold on a per seat basis andauthorize a customer to develop an application program that uses VDS or VersantenJin.   Before that customer may deployan application that it has developed under a development license, it mustpurchase deployment licenses based on the number of computers connected to theserver that will run the application using the Company's database managementsystem.  For certain applications, theCompany offers deployment licenses priced on a per user basis.  Pricing of VDS and Versant enJin variesaccording to several factors, including the number of computer servers on whichthe application will run and the number of users that will be able to accessthe server at any one time.  Customersmay elect to simultaneously purchase development and deployment licenses for anentire project. These development and deployment licenses may also provide forprepayment of a nonrefundable amount for future deployment.

 

Revenue from software license arrangements, includingprepayment revenue, is recognized when all of the following criteria are met:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred;(3) the fee is fixed and determinable; and (4) collection is probable.  If an acceptance period or other contingencyexists, revenue is recognized upon satisfaction of the contingency, customeracceptance or expiration of the acceptance period.

 

Resellers, including value-added resellers anddistributors, purchase development licenses on a per seat basis, on termssimilar to those of development licenses sold directly to end-users.  Resellers are authorized to sublicensedeployment copies of VDS or Versant enJin that are either bundled or embeddedin the resellers’ applications and sold directly to end users.  Resellers are required to report theirdistribution of Versant software and are charged a royalty that is based eitheron the number of copies of application software distributed or computed as apercentage of the selling price charged by the reseller to its end-usercustomers. Revenue from royalties is recognized when reported by the reseller,assuming collection is probable.

 

Revenue from the Company's resale of third-partyproducts is recorded at total contract value with the corresponding costincluded in cost of sales when the Company acts as a principal in thesetransactions and assumes the risks and rewards of ownership, including the riskof loss for collection, delivery or returns. When the Company does not assumethe risks and rewards of ownership, revenue from the resale of third-partyproducts or services is recorded at contract value net of the cost of sales.

 

Probability of collection is assessed using thefollowing customer information: credit service reports, bank and tradereferences, public filings, and/or current financial statements.  Prior payment experience is reviewed on allexisting customers.  Payment terms inexcess of standard payment terms of 30-90 days net, are granted on an exceptionbasis, typically in situations where customers elect to purchase developmentand deployment licenses simultaneously for an entire project and are attemptingto align their payments with deployment schedules.  Extended payment terms are generally only granted to customerswith a proven ability to pay at the time the order is received, and with priorapproval of senior management.

 

The Company uses the residual method to recognizerevenue when a license agreement includes one or more elements to be deliveredat a future date.  If there is anundelivered element under the license arrangement, the Company defers revenuebased on vendor-specific objective evidence of the fair value of theundelivered element, as determined by the price charged when the element issold separately. If vendor-specific objective evidence of fair value does notexist for all undelivered elements, the Company defers all revenue untilsufficient evidence exists or all elements have been delivered. The Companydefers revenue from license arrangements that require significant modificationof the software and/or non-recurring engineering agreements requiring futureobligations not yet performed and record it as revenue using contractaccounting.

 

The Company defers revenue from maintenance andsupport arrangements and recognize it ratably over the term of the arrangement,which is typically twelve months. Training and consulting revenue is recognized when a purchase order isreceived, the services have been performed and collection is deemedprobable.  Consulting services arebilled on an hourly, daily or monthly rate. Training classes are billed based on group or individual attendance.

 

Comprehensive Income

 

In June 1997, the Financial Accounting Standards Board(FASB) issued SFAS No. 130, “Reporting Comprehensive Income,” which requirescompanies to disclose certain information regarding the nature and amounts ofcomprehensive income included in the financial statements.  Accumulated and other comprehensive income(loss) presented in the accompanying consolidated balance sheets consists ofthe cumulative foreign currency translation adjustments. The tax effects of thecomponents of the comprehensive income (loss) are insignificant. 

 

43

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Net Income (Loss) Per Share

 

Basic net income (loss) per share is computed bydividing net income (loss) by the weighted average number of sharesoutstanding.  Diluted net income (loss)per share is computed by dividing net income (loss) by the sum of the weightedaverage number of shares outstanding plus the dilutive potential commonshares.   The dilutive effect of stockoptions is computed using the treasury stock method, and the dilutive effect ofconvertible preferred stock is computed using the if converted method.  Dilutive securities are excluded from thediluted net income (loss) per share computation if their effect isantidilutive.

 

The reconciliation of the numerators and denominatorsof the basic and diluted net income (loss) per share computations is as follows(in thousands, except per share amounts):

 
|                                                                             |   | **Income  (Loss)  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|----------------------------------------------------------------------------------|--------|---------------------------------|--------|---------------------------|--------|-----------------------|--------|
|                                                                             |   |                            |   |                      |   |                  |   |
| **FOR THE YEAR ENDED DECEMBER 31,  2000:**                                       |   |                            |   |                      |   |                  |   |
| Basic net income  per share                                                      |   | $                               | 1,856  |                      | 11,369 |                  | $      | 0.16 |   |
|                                                                             |   |                            |   |                      |   |                  |   |
| Common shares  issuable upon exercise of stock options (treasury stock method)   |   | —                          |   | 306                       |   | —                |   |
| Common shares  issuable upon exercise of warrants (treasury stock method)        |   | —                          |   | 941                       |   | —                |   |
| Common shares  issuable upon exercise of preferred stock (treasury stock method) |   | —                          |   | 2,717                     |   | —                |   |
| Diluted net  income per share                                                    |   | $                               | 1,856  |                      | 15,333 |                  | $      | 0.12 |   |
|                                                                             |   |                            |   |                      |   |                  |   |
| **FOR THE TEN MONTHS ENDED OCTOBER  31, 2001:**                                  |   |                            |   |                      |   |                  |   |
| Basic and  diluted net loss per share                                            |   | $                               | (7,158 | )                         | 12,041 |                  | $      | (0.59 | ) |
| **FOR THE YEAR ENDED OCTOBER 31,  2002:**                                        |   |                            |   |                      |   |                  |   |
| Basic and  diluted net loss per share                                            |   | $                               | (3,390 | )                         | 12,267 |                  | $      | (0.28 | ) |

 

                The followingpotential shares of common stock have been excluded from the computation ofdiluted net loss per share because the effect would have been anti-dilutive (inthousands):

 
|                                                           |   | **Year Ended  October 31, 2002** |   | **Ten Months  Ended  October 31, 2001** |   | **Year Ended  December 31, 2000** |   |
|----------------------------------------------------------------|--------|----------------------------------|--------|-----------------------------------------|--------|-----------------------------------|--------|
| Shares issuable  under stock options                           |   | 3,947                            |   | 3,243                                   |   | 2,218                             |   |
| Shares issuable  pursuant to warrants to purchase common stock |   | 1,333                            |   | 1,458                                   |   | —                            |   |
| Shares issuable  upon conversion of preferred stock            |   | 2,627                            |   | 2,627                                   |   | —                            |   |
|                                                           |   | 7,907                            |   | 7,328                                   |   | 2,218                             |   |

 

                The weightedaverage exercise price of stock options outstanding was $3.35, $3.89 and $5.11as of October 31, 2002, October 31, 2001 and December 31, 2000, respectively.The weighted average exercise price of warrants was $2.13 as of October 31,2002, October 31, 2001 and December 31, 2000.

 

Segment and Geographic Information

 

The Company is organized geographically and by line of business.  The Company has three major line of businessreporting segments: license, support and consulting/training for which thechief operating decision maker (the Company's CEO) evaluates on a regularbasis.  However, the Company alsoevaluates certain line of business segments by vertical industries as well asby product categories.  While managementevaluates results in a number of different ways, the line of businessmanagement structure is the primary basis upon which it assesses financialperformance and allocates resources.

 

The license line of business includes two principal product offerings:a sixth generation object oriented database management system, VersantDeveloper Suite or VDS (formerly ODBMS), and a transaction accelerator forapplication servers, Versant enJin. Versant enJin accelerates Internettransactions for the application server environment. The support line ofbusiness provides customers with a wide range of support services that includeon-site, telephone or internet access to support personnel, as well as softwareupgrades.  The consulting and trainingline of business provides customers with a wide range of consulting andtraining services to assist them in evaluating, installing and customizing VDSor Versant enJin, as well as training classes on the use and operation of theCompany’s products.

 

The accounting policies of the line of business reporting segments arethe same as those described in the summary of significant accounting policies.The Company does not track assets by reporting segments.  Consequently, it is not practicable to showassets by reporting segment.

 

44

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The table below presents a summary of reporting segments (inthousands):

 
|                                   |   | **Year Ended  October 31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   | **Year Ended  December 31,  2000** |   |
|----------------------------------------|--------|-----------------------------------|--------|------------------------------------------|--------|------------------------------------|--------|
| Revenues from  unaffiliated customers: |   |                              |   |                                     |   |                               |   |
| License                                |   | $                                 | 10,106 |                                     | $      | 7,362                              |   | $ | 18,859 |   |
| Support                                |   | 5,300                             |   | 5,135                                    |   | 5,437                              |   |
| Consulting and  training               |   | 4,550                             |   | 11,412                                   |   | 4,149                              |   |
| Total revenue                          |   | 19,956                            |   | 23,909                                   |   | 28,445                             |   |
|                                   |   |                              |   |                                     |   |                               |   |
| Gross profit:                          |   |                              |   |                                     |   |                               |   |
| License                                |   | 8,908                             |   | 6,426                                    |   | 18,042                             |   |
| Support                                |   | 4,009                             |   | 3,944                                    |   | 3,877                              |   |
| Consulting and  training               |   | 509                               |   | 866                                      |   | 210                                |   |
| Total gross  profit                    |   | 13,426                            |   | 11,236                                   |   | 22,129                             |   |
|                                   |   |                              |   |                                     |   |                               |   |
| Other operating  expenses              |   | 17,035                            |   | 18,226                                   |   | 19,977                             |   |
| Non-cash  compensation expense         |   | —                            |   | 22                                       |   | —                             |   |
| Other income  (expense)                |   | 287                               |   | (53                                      | )      | (222                               | )      |
| Income (loss)  before taxes            |   | $                                 | (3,322 | )                                        | $      | (7,065                             | )      | $ | 1,930 |   |

 

The table below presents the Company’s revenue bygeographic region (in thousands):

 
|                            |   | **Year Ended  October 31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   | **Year Ended  December 31,  2000** |   |
|---------------------------------|--------|-----------------------------------|--------|------------------------------------------|--------|------------------------------------|--------|
| Total revenue  attributable to: |   |                              |   |                                     |   |                               |   |
| United States                   |   | $                                 | 13,510 |                                     | $      | 17,438                             |   | $ | 17,393 |   |
| Germany                         |   | 2,404                             |   | 2,286                                    |   | 2,432                              |   |
| France                          |   | 338                               |   | 885                                      |   | 3,198                              |   |
| United Kingdom                  |   | 2,618                             |   | 2,470                                    |   | 4,280                              |   |
| Australia                       |   | 138                               |   | 292                                      |   | 487                                |   |
| Japan                           |   | 713                               |   | 538                                      |   | 635                                |   |
| Other                           |   | 235                               |   | —                                   |   | 20                                 |   |
| Total                           |   | $                                 | 19,956 |                                     | $      | 23,909                             |   | $ | 28,445 |   |

 

The Company's long-lived assets residing in countriesother than the United States are insignificant and thus have not been disclosed.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject theCompany to a concentration of credit risk principally consist of accountsreceivable. The Company performs periodic credit evaluation of its customers’financial condition. The Company generally does not require collateral onaccounts receivable because the majority of the Company’s customers are large,well established companies.  The Companyprovides reserves for estimated credit losses in accordance with management’songoing evaluation.

 

In the year ended October 31, 2002 one customer, IBM,represented 14% of total revenues.  Inthe ten months ended October 31, 2001, two customers accounted forapproximately 28% and 11% of total revenue, respectively.  No customer represented more than 10% oftotal revenue in 2000.  One customerrepresented 15% of accounts receivable at October 31, 2002, two customersrepresented 32% and 15% of accounts receivable at October 31, 2001 and onecustomer represented 11% of accounts receivable at December 31, 2000.

 

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**4.        Recently Issued AccountingPronouncements**

 

In December 2002, the FASBissued Statement of Financial Accounting Standards No. 148 (SFAS 148), *Accounting for Stock-Based Compensation - Transitionand Disclosure*. SFAS 148 amends FASB Statement No. 123 (SFAS 123), *Accounting for Stock-Based Compensation*,to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, SFAS 148 amends the disclosure requirements of SFAS 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The transition guidance and annual disclosure provisions of SFAS 148 areeffective for fiscal years ending after December 15, 2002.  The interim disclosure provisions areeffective for financial reports containing financial statements for interimperiods beginning after December 15, 2002. The Company is currently evaluating the impact of adoption of SFAS 148on its financial position and results of operations.

 

In November 2002, the EITF reacheda consensus on Issue No. 00-21 (EITF 00-21), *RevenueArrangements with Multiple Deliverables*. EITF 00-21 addressescertain aspects of the accounting by a vendor for arrangements under which thevendor will perform multiple revenue generating activities. EITF 00-21 will beeffective for interim periods beginning after June 15, 2003. The Company iscurrently evaluating the impact of adoption of EITF 00-21 on its financialposition and results of operations.

 

In November 2002, the FASB issued Interpretation No.45 (Interpretation 45), *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*, which clarifies disclosure andrecognition/measurement requirements related to certain guarantees.  The disclosure requirements are effectivefor financial statements issued after December 15, 2002 and therecognition/measurement requirements are effective on a prospective basis forguarantees issued or modified after December 31, 2002.  The Company is currently evaluating theimpact of adoption of Interpretation 45 on its financial position and resultsof operations.

 

In July 2001, the FSAB issued SFAS No. 142, *Goodwill and Intangible Assets*, whichsupersedes APB Opinion No. 17, *IntangibleAssets*.  Under SFAS No. 142,goodwill and intangible assets with indefinite lives are not amortized but aretested for impairment annually (unless indication of impairment becomesapparent sooner) using the fair value approach (except in certaincircumstances), while other intangible assets continue to be valued andamortized over their estimated lives, and in-process research and developmentcontinues to be written off immediately. All acquired goodwill must be assignedto reporting units for purposes of impairment testing and segment reportingand, effective January 1, 2002 for fiscal years commencing after December 31,2001, existing goodwill is no longer subject to amortization. Due to theCompany’s 2001 change in fiscal year-end from December 31 to October 31, the Companyadopted SFAS No. 142 effective November 1, 2002. As of October 31, 2002, theCompany had goodwill of $240,440, which will no longer be amortized.

 

In April 2002, the FASB issued SFAS No. 145, *Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB SFAS No. 13, and Technical Corrections*.  SFAS 145 rescinds SFAS 4, *Reporting Gains and Losses from Extinguishment ofDebt-an amendment of APB Opinion No. 30*, which required all gainsand losses from extinguishment of debt to be aggregated and, if material,classified as an extraordinary item, net of related income tax effect. SFAS No.145 also makes non-substantive technical corrections to existingpronouncements. SFAS No. 145 is effective for fiscal years beginning after May15, 2002 with earlier adoption encouraged. The Company does not expect theprovisions of SFAS No. 145 to have a material impact on the Company’s financialposition or results of operations.

 

In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*.  SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.94-3, *Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (IncludingCertain Costs Incurred in a Restructuring)*.  This statement requires recognition of aliability for a cost associated with an exit or disposal activity when theliability is incurred, as opposed to when the entity commits to an exit planunder EITF No. 94-3. This statement also establishes that fair value isobjective for initial measurement of the liability. The provisions of thisstatement are effective for exit or disposal activities that are initiatedafter December 31, 2002. The Company does not expect the provisions of SFAS No.146 to have a material impact on the Company’s financial position or results ofoperations.

 

In January 2002, the EITF reached final consensus onEITF No. 01-14, *Income StatementCharacterization of Reimbursements Received for Out of Pocket Expenses Incurred*.  EITF 01-14 requires companies tocharacterize reimbursements received for out of pocket expenses incurred asrevenue in the income statement. Previously, the Company had netted reimbursements received for out ofpocket expenses against the related expenses in the accompanying consolidatedstatements of operations.  EIFT 01-14applies to financial reporting periods beginning after December 15, 2001, andthe comparative financial statements for prior periods must be reclassified tocomply with EITF 01-14. The Company adopted EITF 01-14 beginning in the secondquarter of 2002.  The adoption of EITF01-14 resulted in an increase in services revenue and cost of services revenueand a decrease in the gross margin percentage.   The effect of this adoption is an increase in revenues and costof revenues of approximately $855,000 for the year ended October 31, 2002,$187,000 for the ten months ended October 31, 2001 and $276,000 for the yearended December 31, 2000.

 

**5.        Lease Obligations**

 

In November 1996, the Company entered into anagreement to lease its corporate headquarters facility under a ten-yearoperating lease agreement commencing on June 1, 1997 and expiring on May 31,2007.  The terms of the lease providefor certain increases in rental payments during the lease term.  Rental expense, including contractualpayment increases, under this agreement is recognized on a straight-linebasis.  The Company also leases fieldoffice space in Europe and India, generally under multi-year operating leaseagreements.  Consolidated rent expensefor the year ended October 31, 2002, the ten month period ended October 31,2001, and the year ended December 31, 2000 was approximately $1,545,000,$1,405,000 and $1,691,000, respectively.

 

The Company’s future annual minimum lease payments atOctober 31, 2002 under non-cancelable operating leases were as follows (inthousands):

 

46

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| **Year  Ending October 31,** |   | **Amount** |   |
|------------------------------|--------|------------|--------|
| 2003                         |   | 1,397      |   |
| 2004                         |   | 1,307      |   |
| 2005                         |   | 1,307      |   |
| 2006                         |   | 1,256      |   |
| 2007                         |   | 869        |   |
|                         |   | $          | 6,136  |   |
|                              |        |            |        |  |

 

The Company’s futureminimum lease payments required under capital leases at October 31, 2002 were$4,000, all of which are classified as current liabilities.

 

**6.        Term Loan andLine of Credit**

 

The Company has a revolving credit line with a wholly owned subsidiaryof its existing bank that expires on April 18, 2003.  The maximum amount that can be borrowed under this line is $5.0million.  As of October 31, 2002, therewere no borrowings  under this line.Borrowings are limited to the amount of eligible accounts receivable and aresecured by a lien on substantially all of the Company’s assets.  Any borrowings would bear interest at thebank’s prime rate plus 4.00% (8.75% at October 31, 2002). The loan agreementcontains no financial covenants, but prohibits the payment of cash dividendsand mergers and acquisitions without the bank’s prior approval.

 

**7.        Shareholders’Equity**

 

Series A Convertible Preferred Stock

 

Preferred stock consists of Series A Convertible Preferred Stock.  Each share of Series A is convertible, atthe election of the holder, into two shares of common stock. The holders ofSeries A will generally vote with the holders of common stock providedthat the Series A is only entitled to a number of votes equal to 50% ofthe number of shares of common stock into which the Series A isconvertible.  The holders of SeriesA are also provided with certain voting protective provisions.  As of October 31, 2002, there were 1,313,743shares of Series A outstanding.  Theliquidation value of the Series A at October 31, 2002, was $14.0 million.

 

1996 Equity Incentive Plan

 

In May 1996, the Company’s Board of Directors adoptedthe 1996 Equity Incentive Plan (the “1996 Equity Plan”), and the Company’sshareholders approved the 1996 Equity Plan in June 1996.    The 1996 Equity Plan provides for thegrant of stock options and stock bonuses and the issuance of restricted stockby the Company to its employees, officers, directors, consultants, independentcontractors and advisors. Any authorized shares that are not issued or subjectto outstanding grants under the 1989 Stock Option Plan became available forgrant and issuance in connection with future awards under the 1996 EquityPlan.  As of October 31, 2002, 4,956,372shares of common stock had been authorized for issuance under the 1996 EquityPlan; this includes any shares previously issuable under the 1989 Option Planand now issuable under the 1996 Equity Plan. As of October 31, 2002, 1,349,599 shares remain available for futureoption grants and 3,606,773 options are outstanding under the 1996 Equity Plan.

 

1996 Directors Stock Option Plan

 

In May 1996, the Company’s Board of Directors adoptedthe 1996 Directors Stock Option Plan (the “Directors Plan”), and the Company’sshareholders approved the Directors Plan in June 1996.  The Directors Plan provides for the grant ofnonqualified stock options to non-employee directors of the Company, includingautomatic grants of options to purchase 10,000 shares of Common stock tonon-employee directors that were granted concurrently with the initial publicoffering, options to new non-employee directors to purchase 20,000 shares ofcommon stock granted on the date on which the new director joins the Board andan additional option to purchase 10,000 shares of common stock to each eligibledirector on each anniversary date of his initial option grant under theDirectors Plan if he has served continuously as a member of the Board since thedate he was first granted an option under the Directors Plan.  The exercise price of all options grantedunder the Directors Plan is the fair market value of the common stock on thedate of grant.  All options grantedunder the Directors Plan vest as to 50% of the shares on each of the first twoanniversaries

 

47

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following the dateof grant, provided the optionee continues as a member of the Board or as aconsultant to the Company.  As of October31, 2002, the Company had authorized 275,000 shares of Common stock forissuance under the Directors Plan.   Asof October 31, 2002, 152,500 shares are outstanding and 122,500 options remainavailable for future option grants under the 1996 Directors Stock Option Plan.

 

48

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Shares Reserved for Future Issuance

 

As of October 31, 2002, the Company had reservedshares of common stock for the following purposes:

 

| Employee stock purchase plan           |   | 441,752   |   |
|----------------------------------------|--------|-----------|--------|
| Stock options  available for grant     |   | 1,472,099 |   |
| Conversion of  preferred stock         |   | 2,627,486 |   |
| Stock Options  issued to non-employees |   | 187,500   |   |
| Exercise of  warrants outstanding |   | 1,332,796 |   |
| Exercise of  stock options outstanding |   | 3,759,273 |   |
|                                   |   | 9,820,906 |   |

 

Stock-based Compensation

 

The Company applies APB Opinion No. 25 and relatedinterpretations in accounting for its option plans.  Accordingly, no compensation cost has been recognized for itsstock plans.  Had compensation cost forthe Company’s stock plans and employee stock purchase plan been determinedbased on the fair value at the grant dates for the awards calculated inaccordance with SFAS No. 123, the Company’s net loss and net loss per sharewould have increased, and net income and net income per share decreased to thepro forma amounts indicated below (in thousands except for per share amounts):

 
|                        |   |        |   | **Year Ended    October 31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   | **Year Ended    December 31,  2000** |   |
|-----------------------------|--------|-------------|--------|-------------------------------------|--------|------------------------------------------|--------|--------------------------------------|--------|
|                        |   |        |   |                                |   |                                     |   |                                 |   |
| Net income  (loss)          |   | As Reported |   | $                                   | (3,390 | )                                        | $      | (7,158                               | )      | $ | 1,856 |   |
|                        |   | Pro forma   |   | $                                   | (5,585 | )                                        | $      | (9,419                               | )      | $ | (1,623 | ) |
|                        |   |        |   |                                |   |                                     |   |                                 |   |
| Basic net loss  per share   |   | As Reported |   | $                                   | (0.28  | )                                        | $      | (0.59                                | )      | $ | 0.16 |   |
|                        |   | Pro forma   |   | $                                   | (0.46  | )                                        | $      | (0.78                                | )      | $ | (0.14 | ) |
|                        |   |        |   |                                |   |                                     |   |                                 |   |
| Diluted net loss  per share |   | As Reported |   | $                                   | (0.28  | )                                        | $      | (0.59                                | )      | $ | 0.12 |   |
|                        |   | Pro forma   |   | $                                   | (0.46  | )                                        | $      | (0.78                                | )      | $ | (0.11 | ) |

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing assumptions:

 
|                     |   | **Year Ended  October 31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   | **Year Ended  December 31,  2000** |   |
|--------------------------|--------|-----------------------------------|--------|------------------------------------------|--------|------------------------------------|--------|
|                     |   |                              |   |                                     |   |                               |   |
| Risk free  interest rate |   | 3.5                               | %      | 4.3                                      | %      | 6.2                                | %      |
| Dividend yield           |   | 0                                 | %      | 0                                        | %      | 0                                  | %      |
| Volatility               |   | 107                               | %      | 107                                      | %      | 100                                | %      |
| Expected life            |   | 3 years                           |   | 3 years                                  |   | 3 years                            |   |

 

The fair value of employee stock purchase rightsgranted under the 1996 Employee Stock Purchase Plan was estimated on the dateof grant using the Black-Scholes option-pricing model with the followingassumptions:

 
|                    |   | **Year Ended  October 31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   | **Year Ended  December 31,  2000** |   |
|-------------------------|--------|-----------------------------------|--------|------------------------------------------|--------|------------------------------------|--------|
| Risk free interest rate |   | 2.39                              | %      | 4.42                                     | %      | 5.55                               | %      |
| Dividend yield          |   | 0                                 | %      | 0                                        | %      | 0                                  | %      |
| Volatility              |   | 107                               | %      | 107                                      | %      | 100                                | %      |
| Expected life           |   | 0.5-2 years                       |   | 0.5-2 years                              |   | 0.5-2 years                        |   |

 

 

49

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Stock Options

 

Option activity under all of the Company’s optionplans is as follows:

 
|                         |   | **Options Outstanding** |       |
|------------------------------|--------|-------------------------|------------|
|                         |   | **Options  Available**  |       | **Number of  Shares** |   | **Weighted  Average  Exercise Price** |   |
|                         |   |                    | ** ** |   | ** ** |   | ** ** |
| Balance at December 31, 1999 |   | 185,308                 |       | 2,417,480 |   | $ | 3.79 |   |
| Authorized                   |   | 1,000,000               |       | — |   | — |   |
| Granted                      |   | (1,592,554              | )          | 1,592,554 |   | 5.93 |   |
| Exercised                    |   | —                  |       | (722,408 | ) | 2.94 |   |
| Repurchased                  |   | 1,807                   |       | — |   | — |   |
| Canceled                     |   | 763,978                 |       | (763,978 | ) | 5.01 |   |
| Balance at December 31, 2000 |   | 358,539                 |       | 2,523,648 |   | $ | 5.11 |   |
| Authorized                   |   | 1,600,550               |       | — |   | — |   |
| Granted                      |   | (1,510,100              | )          | 1,510,100 |   | 2.45 |   |
| Exercised                    |   | —                  |       | (87,945 | ) | 1.19 |   |
| Canceled                     |   | 702,411                 |       | (702,411 | ) | 5.11 |   |
| Balance at October 31, 2001  |   | 1,151,400               |       | 3,243,492 |   | $ | 3.89 |   |
| Authorized                   |   | 850,000                 |       | — |   | — |   |
| Granted                      |   | (973,800                | )          | 973,800 |   | 1.52 |   |
| Exercised                    |   | —                  |       | (13,420 | ) | 1.30 |   |
| Canceled                     |   | 444,499                 |       | (444,499 | ) | 3.34 |   |
|                         |   |                    |       |   |   |   |   |
| Balance at October 31, 2002  |   | 1,472,099               |       | 3,759,273 |   | $ | 3.35 |   |
|                              |        |                         |            |  |  |  |  |  |  |

 

Thefollowing table summarizes information concerning outstanding and exercisableoptions at October 31, 2002.

 
|                 |   | **Options  Outstanding**                        |       |                                               |       | **Options  Exercisable**               |       |
|----------------------|--------|-------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------|------------|
| **Exercise  Prices** |   | **Number  Outstanding   at October 31,   2002** |       | **Weighted  Average  Remaining  Contractual Life** |       | **Weighted  Average  Exercise  Price** |       | **Number  Exercisable at  October 31,  2002** |   | **Weighted  Average  Exercise  Price** |   |
|                 |   |                                            | ** ** |                                               | ** ** |                                   | ** ** |   | ** ** |   | ** ** |
| From $0.42 to  $0.70 |   | 121,000                                         |       | 9.45                                               |       | $                                      | 0.62       |   | — |   | $ | — |   |
| From $1.05 to  $1.35 |   | 436,148                                         |       | 8.08                                               |       | 1.23                                   |       | 375,105 |   | 1.24 |   |
| From $1.55 to  $2.22 |   | 894,050                                         |       | 8.95                                               |       | 1.66                                   |       | 133,098 |   | 1.90 |   |
| From $2.38 to  $3.38 |   | 869,926                                         |       | 7.57                                               |       | 2.62                                   |       | 632,344 |   | 2.59 |   |
| From $3.75 to  $4.75 |   | 457,383                                         |       | 6.47                                               |       | 4.23                                   |       | 386,585 |   | 4.25 |   |
| From $4.94 to  $5.69 |   | 455,500                                         |       | 6.60                                               |       | 5.17                                   |       | 373,519 |   | 5.19 |   |
| From $6.00 to  $8.19 |   | 517,366                                         |       | 5.78                                               |       | 7.30                                   |       | 487,802 |   | 7.31 |   |
| $ 18.00              |   | 7,900                                           |       | 4.98                                               |       | 18.00                                  |       | 7,900 |   | 18.00 |   |
|                 |   | 3,759,273                                       |       | 7.51                                               |       | 3.35                                   |       | 2,396,353 |   | 4.02 |   |
|                      |        |                                                 |            |                                                    |            |                                        |            |  |  |  |  |  |  |

 

1996 Employee Stock Purchase Plan

 

In May 1996, the Board adopted the 1996 Employee StockPurchase Plan (the “Purchase Plan”). The Company’s shareholders approved thePurchase Plan in June 1996.  At thattime, the Company reserved 650,000 shares of common stock for issuance underthe Purchase Plan.  The Purchase Planenables eligible employees to purchase common stock at 85% of the lower of thefair market value of the Company’s common stock on the first business day ofeach offering period which is 24 month in length, or the last day of eachpurchase period, which is 6 months in length. For the year ended October 31, 2002, employees purchased 232,092 sharesof common stock at an average price of $1.32 per share.

 

Non Cash Compensation

 

The Company recorded $337,000 of non-cash compensation expense in 1999related to 125,000 options granted to a public relations firm pursuant to aNovember 1, 1999 agreement.  Theseoptions were exercisable in full at a weighted average of  $4.45 per vested share.  The agreement also granted a monthlyretainer of $5,000 for services provided. These options expired in November of 2002.

 

 

50

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In January of 2001, the Company renewed the agreement, which includescompensation to the public relations firm for services rendered at a monthlyrate of $6,000 and 62,500 non-qualified stock options under its 1996 EquityIncentive Plan. Of the 62,500 options granted 6,500 vested in full at $1.61 pershare, and the remaining 56,000 options will vest based upon meeting certainperformance criteria.  The non-vestedoptions were exercisable at a weighted average exercise price of  $4.67 per share.  The vested and unvested options expired in November 2002.  The Company recorded $22,000 to non-cashcompensation expense in 2001 related to these options.

 

**8.        Income Taxes**

 

The Company accounts for income taxes pursuant to the provisions ofSFAS No. 109, “Accounting for Income Taxes,” which requires an asset andliability approach to accounting for income taxes. Deferred tax liabilities andassets are determined based on the difference between the financial statementcarrying amounts and the tax basis of assets and liabilities and are measuredusing the enacted statutory tax rates in effect at the balance sheet date. TheCompany records a valuation allowance to reduce its deferred tax assets whenuncertainty regarding that realizability exists.

 

Income (loss) before provision for income taxes consisted of (in thousands):

 
|          |   | **Year Ended**   |   | **Ten Months  Ended** |   | **Year Ended**    |   |
|---------------|--------|------------------|--------|-----------------------|--------|-------------------|--------|
|          |   | **October  31,** |   | **October  31,**      |   | **December  31,** |   |
|          |   | **2002**         |   | **2001**              |   | **2000**          |   |
| United States |   | $                | (4,266 | )                     | $      | (6,039            | )      | $ | (477 | ) |
| International |   | 944              |   | (1,026                | )      | 2,377             |   |
|          |   | $                | (3,322 | )                     | $      | (7,065            | )      | $ | 1,930 |   |

 

The provision for income taxes consisted of the following (inthousands):

 
|                              |   | **Year Ended  October  31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   | **Year Ended  December 31,  2000** |   |
|-----------------------------------|--------|-----------------------------------------|--------|------------------------------------------|--------|------------------------------------|--------|
| Current:                          |   |                                    |   |                                     |   |                               |   |
| Federal                           |   | $                                       | — |                                     | $      | —                             |   | $ | — |   |
| State                             |   | —                                  |   | —                                   |   | —                             |   |
| Foreign withholding               |   | 68                                      |   | 93                                       |   | 74                                 |   |
| Total current                     |   | 68                                      |   | 93                                       |   | 74                                 |   |
| Deferred:                         |   |                                    |   |                                     |   |                               |   |
| Federal                           |   | —                                  |   | —                                   |   | —                             |   |
| State                             |   | —                                  |   | —                                   |   | —                             |   |
| Total deferred                    |   | —                                  |   | —                                   |   | —                             |   |
| Total provision for  income taxes |   | $                                       | 68     |                                     | $      | 93                                 |   | $ | 74 |   |

 

The provision for income taxes differs from the amount estimated byapplying the statutory federal income tax rate to income (loss) before taxes asfollows (in thousands):

 
|                                                           |   | **Year Ended  October  31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   | **Year Ended  December 31,  2000** |   |
|----------------------------------------------------------------|--------|-----------------------------------------|--------|------------------------------------------|--------|------------------------------------|--------|
|                                                           |   |                                    |   |                                     |   |                               |   |
| Federal tax  (benefit) at statutory rate                       |   | $                                       | (1,162 | )                                        | $      | (2,473                             | )      | $ | 676 |   |
| State tax  (benefit) at statutory rate, net of federal benefit |   | (115                                    | )      | (223                                     | )      | 122                                |   |
| Change in  valuation allowance                                 |   | 1,000                                   |   | 2,682                                    |   | (1,178                             | )      |
| Foreign tax  differential                                      |   | 268                                     |   | 7                                        |   | 373                                |   |
| Other                                                          |   | 77                                      |   | 100                                      |   | 81                                 |   |
| Provision for  income taxes                                    |   | $                                       | 68     |                                     | $      | 93                                 |   | $ | 74 |   |
|                                                           |   |                                    |   |                                     |   |                               |   |
| Effective tax  rate                                            |   | —                                  |   | —                                   |   | 4                                  | %      |

 

The components of the net deferred tax asset were as follows (inthousands):

 
|                              |   | **October  31,  2002** |   | **October  31,  2001** |   | **December  31,  2000** |   |
|-----------------------------------|--------|------------------------|--------|------------------------|--------|-------------------------|--------|
|                              |   |                   |   |                   |   |                    |   |
| Deferred tax  asset:              |   |                   |   |                   |   |                    |   |
| Net operating  loss carryforwards |   | $                      | 15,808 |                   | $      | 15,247                  |   | $ | 12,470 |   |
| Tax credit  carryforwards         |   | 3,071                  |   | 2,959                  |   | 2,714                   |   |
| Other                             |   | 832                    |   | 650                    |   | 703                     |   |
|                              |   | 19,711                 |   | 18,856                 |   | 15,887                  |   |
| Valuation  allowance              |   | (19,711                | )      | (18,856                | )      | (15,887                 | )      |
| Net deferred tax  asset           |   | $                      | — |                   | $      | —                  |   | $ | — |   |

 

51

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At October 31, 2002, the Company had federal and statenet operating loss carryforwards of $43.5 million and $10.2 million, respectively and tax creditcarryforwards of $3.0 million expiring on various dates through 2022.  Due to the Company’s history of operatinglosses, the Company believes that there is sufficient uncertainty regarding therealizability of these carryforwards and, therefore, a valuation allowance ofapproximately $19.7 million has been recorded against the Company’s netdeferred tax assets of approximately $19.7 million.  Approximately $1.5 million of the valuation allowance fordeferred tax assets is attributable to employee stock option deductions, thebenefit from which will be allocated to additional paid-in capital when and ifsubsequently realized.  The Company willcontinue to assess the realizability of the tax benefit available based onactual and forecasted operating results.

 

Due to "change in ownership" provisions of theInternal Revenue Code of 1986, the availability of net operating loss and taxcarryforwards to offset federal taxable income in future periods is subject toan annual limitation due to changes in ownership for income tax purposes.

 

**9.        Acquisitionof Soft Mountain**

 

On September 15, 1998, the Company acquired 100% ofthe outstanding equity of Soft Mountain S.A. (“Soft Mountain”), a Frenchcompany, in return for approximately $136,000 in cash and 245,586 shares of theCompany’s common stock, valued at $2.625per share.  The acquisition of SoftMountain was accounted for using the purchase method of accounting and resultedin the Company recording goodwill of $1.2 million.     In November 1999, the Company issued an additional 30,000shares of common stock to the original shareholders of Soft Mountain inconnection with the acquisition.  Thisadditional cost was added to the original goodwill amount. The Company wroteoff the remaining balance of goodwill in the amount of $555,000 during 2001,due to an impairment in the carrying value of the asset and the closure of theFrench office.

 

**10.      VertexWarrants**

 

In connection with the issuance of Series A Convertible Preferred Stockin fiscal 1999, the Company issued warrants to purchase 1,489,799 shares of theCompany’s common stock for cash consideration of $73,357. In September 2000,176,056 shares of Series A were converted to 352,112 common shares and warrantsto purchase 158,450 shares of common stock were exercised for a total of$338,000.  The warrants have an exerciseprice of $2.13 per share, were immediately exercisable and expire upon theearlier of:

 

(1)          July 11, 2004;

(2)          an acquisition of theCompany (whether by merger, consolidation, tender offer or otherwise) in whichthe  Company’s shareholders prior to theacquisition own less than a majority of the surviving corporation, or the    sale of all or substantially all of theCompany’s assets; or

(3)          15 business days afterthe Company gives notice to the holder that the Company’s stock price hasclosed above $12.00 for 45 consecutive business days.

 

At October 31, 2002, warrants to purchase 1,155,293 shares of commonstock are still outstanding.

 

52

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The shares eligible for resale upon execution of thewarrants and conversion of the Series A Stock have been registered under theSecurities Act of 1933 under two separate registration statements on FormS-3.  Each investor also agreed notto purchase more than 100,000 additional shares in the Company without theCompany’s approval so long as such investor holds more than 5% of theCompany’s outstanding securities.

 

**11.      LegalProceedings**

 

The Company and certain of itspresent and former officers and directors were named as defendants in fourclass action lawsuits filed in the United States District Court for theNorthern District of California on January 26, 1998, February 5, 1998, March11, 1998 and March 18, 1998. On June 19, 1998, a Consolidated Amended Complaintwas filed by the court-appointed lead plaintiff.  After the court dismissed two amended complaints, plaintiffsfiled a Third Amended Complaint on May 10, 2001 that alleged violations ofSections 10(b) and 20(a) of the Securities Exchange Act, and Securities and ExchangeCommission Rule 10b-5 promulgated under the Securities Exchange Act, inconnection with public statements about Versant and its financialperformance.  On December 4, 2001, thecourt dismissed the Third Amended Complaint with prejudice due to plaintiff’sfailure to state a claim of their securities fraud action.  On December 13, 2001, plaintiffs filed anotice of appeal to the Ninth Circuit Court of Appeals. On May 2, 2002, theplaintiffs, now as appellants, filed an opening brief alleging the dismissalwas in error and should be reversed. The Company filed its answeringbrief on July 12, 2002, and the appellant filed their reply brief on August 9,2002. Oral arguments were heard on January 14, 2003 and on January 23, 2003 the Court of Appeals affirmedthe District Court’s dismissal.

 

**12.      Subsequent Events**

 

On November 20, 2002 the Company announced that it hadacquired privately held Mokume Software, Inc., for 2,424,000 shares of Versantcommon stock (approximately 19.6% of Versant’s currently outstanding commonshares). The majority of the purchase price will be allocated to goodwill andother purchased intangibles. Mokume delivers next generation real-timesolutions to global customers in the manufacturing industry. 

 

Pursuant to the merger agreement under which itacquired Mokume, the Company is entitled to repurchase from the former Mokumestockholders fifty percent (50%), or 1,212,000, of the shares of Versant commonstock issued to them in the Merger at the price of $0.01 per share if theCompany does not recognize at least $1,500,000 of revenue from the real-timecomputing business (as defined in the acquisition agreement) by May 19, 2004(or by November 19, 2004 if the Company recognizes at least $900,000 of suchrevenue by May 19, 2004).  Furtherdetails regarding the Company's acquisition of Mokume may be found in theCompany's current report on Form 8-K that was filed with the Securities andExchange Commission on November 27, 2002.

 

**Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

Effective May 23, 2002, the Company elected to changeits certifying accountant and stated the following in the Form 8-K filed on May24, 2002 in connection with the change:

 

(i)                                                             Effective May 23, 2002, we dismissed Arthur Andersen LLP as our independent accountants.

(ii)                                                          The reports of Arthur Andersen LLP on our consolidated financial statements for the fiscal year ended December 31, 2000 and the ten-month transition period ended October 31, 2001 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

(iii)                                                       The decision to dismiss Arthur Andersen was approved by our audit committee and board of directors on May 23, 2002.

(iv)                                                      In connection with the audits of our financial statements for the year ended December 31, 2000,

 

53

 

the ten-month transition period ended October 31, 2001 and the subsequent period, preceding the dismissal, we had no disagreements with Arthur Andersen, whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused them to make reference to the subject matter of the disagreements in connection with its reports.  We have requested Arthur Andersen to furnish a letter addressed to the Commission as to whether it agreed with the above statements, and a copy of that letter, dated May 20, 2002, was filed as Exhibit 16 to our report on Form 8-K.

 

We engaged KPMG LLP, as our new independent auditors effective May 23, 2002.

 

Our former independent public accountants, Arthur Andersen LLP, ceased practicing before the Securities and Exchange Commission on or about August 31, 2002.  Consequently, we have been unable to obtain Arthur Andersen LLP's consent to the inclusion in this annual report on Form 10-K of their report for our consolidated balance sheet as of October 31, 2001 or the related consolidated statements of our operations, shareholders' equity and cash flows for the period from January 1, 2001 to October 31, 2001 and for the year ended December 31, 2000 or to the incorporation by reference of their report into our previously filed registration statements under the Securities Act of 1933, and we have omitted that consent with this Annual Report on Form 10-K in reliance upon Rule 437a of the Securities Act of 1933.  Because we have not been able to obtain Arthur Andersen LLP's consent, you may not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act of 1933 for any untrue statements of a material fact contained in our financial statements audited by Arthur Andersen LLP or any omission to state a material fact required to be stated therein.

 

54

 

**SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**

 
|                                 |   | **Balance at  Beginning of Period** |       | **Additions  Charged to  Income** |       | **Deductions** |       | **Balance at  End of Period** |       |
|--------------------------------------|--------|-------------------------------------|------------|-----------------------------------|------------|----------------|------------|-------------------------------|------------|
|                                 |   |                                |       | **(in  thousands)**               |       |           |       |
| **Allowance for doubtful accounts:** |   |                                | ** ** |                              | ** ** |           | ** ** |                          | ** ** |
| Year ended  December 31, 2000        |   | $                                   | 414        |                              | 421        |           | 284        |                          | $          | 551 |   |
| Ten months ended  October 31, 2001   |   | $                                   | 551        |                              | 302        |           | 371        |                          | $          | 482 |   |
| Year ended  October 31, 2002         |   | $                                   | 482        |                              | 296        |           | 91         |                          | $          | 687 |   |

 

**PART III**

 

**Item 10.  Directors and Executive Officers of theRegistrant.**

 

Information regarding our executive officers appearsin Item 4A of Part I of this Annual Report on Form 10-K, under the heading“Executive Officers of the Registrant.”

 

Set forth below isinformation regarding the members of our Board of Directors.

 
| **Name of  Director**         |   | **Age** |   | **Principal  Occupation**                                                                          |   | **Director  Since** |   |
|-------------------------------|--------|---------|--------|----------------------------------------------------------------------------------------------------|--------|---------------------|--------|
| William Henry  Delevati(1)(2) |   | 54      |   | Consultant                                                                                         |   | 1999                |   |
| Nick Ordon                    |   | 55      |   | President and Chief Executive Officer of the Company                                               |   | 1998                |   |
| Shyam Rangole(1)              |   | 63      |   | Consultant                                                                                         |   | 2000                |   |
| Daniel  Roberts(1)(2)         |   | 52      |   | Executive Vice President of Business Operations and  Chief Information Officer, the PMI Group Inc. |   | 2001                |   |
| William R.  Shellooe          |   | 65      |   | Consultant                                                                                         |   | 2000                |   |
| Bernhard Woebker              |   | 53      |   | Consultant                                                                                         |   | 1999                |   |

 

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(1)      Member of the Audit Committee.

(2)      Member of the Compensation Committee.

 

**William Henry Delevati** has served as a director of Versant since October1999. Since April 2000, Mr. Delevati has served as a consultant to variouscompanies located in the Silicon Valley area. From October 1999 to April 2000, Mr. Delevati served as the SeniorVice President, Information Technology and Chief Information Officer of AspectTechnology, an automated call device company. From November 1995 to April 1999, Mr. Delevati served as Vice Presidentof Worldwide Information Services for Quantum Corporation, a storage devicecompany.  From April 1995 to November1995, he was Chief Information Officer, Senior Vice President of MIS for ConnerPeripherals, a storage device company. From September 1994 to April 1995, he was Chief Information Officer,Vice President of Worldwide MIS for Borland Corporation, a software toolscompany.  From September 1993 toSeptember 1994, he was Chief Information Officer, Vice President of WorldwideMIS for Logitech, a computer peripheral device company.  From December 1987 to September 1993, he wasDirector of Application Development and Global Information Resources for SunMicrosystems, Inc.  Mr. Delevatireceived a Bachelor of Science degree in Operations Research in 1974 fromArizona State University.

 

**Nick Ordon** has served as President, ChiefExecutive Officer and a director of Versant since he joined Versant inJanuary 1998.  From July 1996to December 1997, Mr. Ordon was Vice President and General Manager of

 

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Messaging at Lotus Development Corporation, a software developmentcompany and wholly-owned subsidiary of International Business MachinesCorporation.  From August 1994 toJuly 1996, he was Vice President and General Manager of the CommercialBusiness Unit of Lockheed Martin Corporation, an aerospace products company.From January 1993 to August 1994, Mr. Ordon served as GeneralManager, NetWare Operations with Hewlett-Packard Company. Mr. Ordon receivedboth a Bachelor and Masters of Science degree in Aerospace Engineering from theUniversity of Colorado in 1970 and 1971, respectively, and a Masters ofBusiness Administration degree in Finance and Operations from SyracuseUniversity in 1980.

 

**Shyam Rangole** has served as a director of the Company since October2000. Since July 2001, Mr. Rangole has been a consultant to various informationtechnology companies. From 1996 until June 2001, he was Vice President of InformationTechnology of Sun Microsystems, Inc. From 1987 to 1996, he held variousmanagement positions with Sun, including Director of IT Operations and VicePresident of Information Technology for the SunSoft, Corporate Resources,Network Storage and Vendor Relations and Sourcing groups.  Mr. Rangole received a Bachelor of Sciencedegree in Mechanical Engineering in 1961 from Nagpur University, India and aMasters of Science degree in Industrial Engineering and Operations Research in1970 from the University of Oklahoma.

 

**Daniel Roberts** has served as a director ofthe Company since July 2001.  SinceMarch 2000, he has been Executive Vice President of Business Operations andChief Information Officer of the PMI Group Inc., a private mortgage guarantyinsurance company, and between December 1997 and March 2000 he was its SeniorVice President and Chief Information Officer. From 1994 to 1997, Mr. Roberts served as Vice President and ChiefInformation Officer for St. Joseph Health System, a California not-for-profithealth care system.  From 1990 through1994, Mr. Roberts served as Vice President and Chief Information Officer forCatholic Healthcare West, a health care system comprised of hospitals andmedical practice groups.  From 1984until 1990, Mr. Roberts held the position of Regional Managing Partner in theInformation Technology Group of Deloitte & Touche, an accounting andconsulting firm.  Mr. Robertsreceived a Bachelor of Arts degree in Mathematics and a Master of Arts inQuantitative Methods from the University of California, Los Angeles in 1971 and1973, respectively.

 

**William R. Shellooe** has served as a director of the Company since April2000.  Since June 2002, Mr. Shellooe hasbeen a consultant to Amphus, a private company developing and distributingserver management software. Between October 2000 and May 2002, he served asSenior Vice President, Worldwide Field Operations of the Company.  Between April 1997 and October 2000,Mr. Shellooe was Vice President of Sales for HAL Computer, a developer of SPARCprocessors and a subsidiary of Fujitsu Corporation.  Between 1994 and 1997, Mr. Shellooe served in a variety ofexecutive officer positions with AXIL Computer, Inc., a SPARC systems companyand a subsidiary of Hyundai Electronics. From January 1994 to December 1994, he served as Vice President of Salesof AXIL, from December 1994 to July 1996, as its Senior Vice President of Salesand Marketing and from July 1996 to February 1997 as its Chief ExecutiveOfficer.  Prior to working with AXILComputer, Inc., Mr. Shellooe served in a variety of executive managementpositions with MASPAR Computer Corporation, Pyramid Technology andHewlett-Packard.  Mr. Shellooereceived his Bachelor of Science degree in Electrical Engineering in 1960 and aMasters of Business Administration degree in 1966 from the University of SantaClara.

 

**Bernhard Woebker** has served as a director of the Company since June1999. Since late 1999, Mr. Woebker has been a consultant to various investmentbanking and venture capital firms in Europe and the United States.  From January 1999 until July 2001, he servedas Executive Vice President of the Company and from March 1997 until January1999 he served as the Company’s Vice President and General Manager Europe.  From 1994 to March 1997, he wasPresident of Versant Object Technology GmbH, an independently-owneddistributorship for Versant products in Europe that was acquired by the Companyin March 1997.  From 1976 until 1994,Mr. Woebker held a variety of positions in Germany and the United States withNixdorf Computer AG, Nixdorf Computer Engineering Corp. and Siemens NixdorfInformationssysteme AG, all information technology companies, includingPresident and CEO of Nixdorf Computer Engineering Corp. in Boston,Massachusetts from 1986 to 1989.  Mr.Woebker has also served as Senior Vice President, Pyramid TechnologyCorp./Europe and as Vice President, NeXT Computer, Inc./Europe.  Mr. Woebker received a Masters of Sciencedegree in Mathematics and Computer Science from the University of Hannover in1973.

 

There is no familyrelationship between any of the foregoing directors or between any of suchdirectors  and any of Versant’sexecutive officers.

 

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**DirectorCompensation**

 

Members of Versant'sBoard of Directors do not receive cash compensation for their services asdirectors but are reimbursed for their reasonable expenses in attendingmeetings of the Board.

 

Directors who arenot employees of Versant are entitled to participate in the 1996 DirectorsStock Option Plan (the “Directors Plan”). The purpose of the Directors Plan is to provide incentive for members ofthe Board who are not also employees of Versant or any parent, subsidiary oraffiliate of Versant by providing such persons with an opportunity to purchaseshares of Common Stock of Versant.  TheDirectors Plan provides for each non-employee director to receive an option topurchase 20,000 shares of Versant’s Common Stock upon initially joining theBoard and an additional option to purchase 10,000 shares of the Company’sCommon Stock each year on the anniversary of the initial grant to suchnon-employee director, as long as the director continues to serve on the Board.Each option granted to an eligible director vests as to 50% of the sharesgranted on each of the first two successive anniversaries of the grant date.

 

During fiscal2002, the following option grants were made to Versant’s directors pursuant tothe Directors Plan.

 
| **Non-Employee Director** |   | **Date of Grant** |   | **Type of Grant** |   | **Number  of Shares** |   | **Exercise Price  Per Share** |   |
|---------------------------|--------|-------------------|--------|-------------------|--------|-----------------------|--------|-------------------------------|--------|
|                      |   |              |   |              |   |                  |   |                          |   |
| Daniel Roberts            |   | 07/19/2002        |   | Succeeding        |   | 10,000                |   | $                             | 0.70   |   |
| Bernhard Woebker          |   | 07/19/2002        |   | Succeeding        |   | 10,000                |   | 0.70                          |   |
| Shyam Rangole             |   | 10/18/2002        |   | Succeeding        |   | 10,000                |   | 0.54                          |   |
| William Henry Delevati    |   | 10/21/2002        |   | Succeeding        |   | 10,000                |   | 0.42                          |   |
|                           |        |                   |        |                   |        |                       |        |                               |        |  |

 

Grants under the Directors Plan vest 50% on each ofthe two anniversaries following the date of grant so long as the recipients ofsuch grants continue to serve as directors or consultants to Versant.

 

**Section16(a) Beneficial Ownership Reporting Compliance**

 

Section 16 of the Exchange Act requires the Company’sdirectors and officers, and persons who own more than 10% of a registered classof Versant’s equity securities, to file initial reports of ownership and reportsof changes in ownership with the Securities and Exchange Commission.  Such persons are required by SEC regulationto furnish Versant with copies of all Section 16(a) forms they file.

 

Based solely on its review of the copies of such formsfurnished to Versant and written representations from the executive officersand directors of Versant, Versant believes that all Section 16(a) filingrequirements were met during fiscal 2002.

 

**Item11.  Executive Compensation.**

 

The following table sets forth all compensationawarded to or earned or paid for services rendered in all capacities to Versantduring each of the twelve months ended December 31, 1999 and 2000, the tenmonths ended October 31, 2001 and for the twelve months ended October 31, 2002by Nick Ordon, Versant’s President and Chief Executive Officer, and theCompany’s three other most highly compensated executive officers during fiscal2002 (together, the “Named Executive Officers”).  This information includes the dollar values of base salaries andbonus awards, the number of shares subject to stock options granted and certainother compensation, whether paid or deferred.

 

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**SummaryCompensation Table**

 
|                                       |   |                |   |                    |   |             |   |                                  |   | **Long-Term  Compensation**             |   |
|--------------------------------------------|--------|---------------------|--------|-------------------------|--------|------------------|--------|---------------------------------------|--------|-----------------------------------------|--------|
|                                       |   |                |   | **Annual Compensation** |   | **Awards**       |   |
| **Name and Principal Position**            |   | **Fiscal  Year(1)** |   | **Salary ($)**          |   | **Bonus ($)(2)** |   | **Other Annual  Compensation ($)(3)** |   | **Securities  Underlying  Options (#)** |   |
|                                       |   |                |   |                    |   |             |   |                                  |   |                                    |   |
| Nick Ordon                                 |   | 2002                |   | 273,097                 |   | —           |   | 1,814                                 |   | 50,000                                  |   |
| *President and Chief Executive Officer*    |   | 2001                |   | 223,335                 |   | —           |   | 1,512                                 |   | 15,000                                  |   |
|                                       |   | 2000                |   | 245,839                 |   | 50,000           |   | 1,814                                 |   | 75,000                                  |   |
|                                       |   | 1999                |   | 200,000                 |   | 245,000          |   | 1,814                                 |   | 150,000                                 |   |
|                                       |   |                |   |                    |   |             |   |                                  |   |                                    |   |
| Lee McGrath                                |   | 2002                |   | 179,619                 |   | —           |   | 558                                   |   | 45,000                                  |   |
| *Vice President, Chief Financial Officer*  |   | 2001                |   | 145,333                 |   | —           |   | 300                                   |   | 45,000                                  |   |
| *and Secretary*                            |   | 2000                |   | 66,667                  |   | —           |   | 213                                   |   | 70,000                                  |   |
|                                       |   | 1999                |   | —                  |   | —           |   | —                                |   | —                                  |   |
|                                       |   |                |   |                    |   |             |   |                                  |   |                                    |   |
| William Shellooe(4)                        |   | 2002                |   | 11,174                  |   | 55,656           |   | 4,674                                 |   | 15,000                                  |   |
| *Senior**Vice  President, Worldwide Field* |   | 2001                |   | 141,667                 |   | 145,186          |   | 3,036                                 |   | 8,000                                   |   |
| *Operations*                               |   | 2000                |   | 38,686                  |   | 40,314           |   | 759                                   |   | 135,000                                 |   |
|                                       |   | 1999                |   | —                  |   | —           |   | —                                |   | —                                  |   |
|                                       |   |                |   |                    |   |             |   |                                  |   |                                    |   |
| Tom Miura                                  |   | 2002                |   | 200,272                 |   | 44,565           |   | 642                                   |   | 45,000                                  |   |
| *Senior* Vice *President, Chief Operating* |   | 2001                |   | 166,667                 |   | 86,999           |   | 550                                   |   | 12,500                                  |   |
| *Officer*                                  |   | 2000                |   | 135,929                 |   | 53,016           |   | 501                                   |   | 102,500                                 |   |
|                                       |   | 1999                |   | —                  |   | —           |   | —                                |   | —                                  |   |

 

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(1)     In August 2001, we changed our fiscal yearend from December 31 to October 31. Amounts reported in the table for fiscal2001 and 2002 represent compensation for the ten months ended October 31, 2001and twelve months ending October 31, 2002, respectively.  Amounts reported for 1999 and 2000 representcompensation for the twelve-month calendar year ending December 31 of thoseyears.

 

(2)     Bonus amounts for 1999 and 2000 weregenerally paid at the beginning of the following year.  Some bonus amounts for 1999 were, however,paid during that year.  Bonuses in 1999and 2000 were paid pursuant to a plan approved by the Compensation Committee.Amounts reported for Messrs. Shellooe and Miura for fiscal 2001 and 2002represent commissions only; no bonuses were paid in fiscal 2001 or 2002.

 

(3)                All of the amountsidentified in the column represent payment of life insurance premiums.

 

(4)                Mr. Shellooe wasSenior Vice President, Worldwide Field Operations until May 31, 2002 andremained as an employee with Versant though December 31, 2002.  He is currently a member of Versant's Boardof Directors.

 

**OptionGrants in Fiscal 2002**

 

Thefollowing table presents information concerning grants of stock options to theexecutive officers listed in the Summary Compensation Table above during fiscal2002.  In accordance with the rules ofthe Securities and Exchange Commission, the table presents the hypotheticalgains or “option spreads” that would exist for the options as the end of theirrespective ten-year terms.  These gainsare based on assumed annual rates of stock price appreciation of 5% and 10%from the date the option was granted to the end of the option term.

 

Allof the options presented in the table below were granted pursuant to our 1996Equity Incentive Plan.  These optionsare either incentive stock options or nonqualified stock options and generallyvest and become exercisable with respect to 25% of the shares subject to theoption on the nine-month anniversary of the date of grant and with respect toan additional 2.778% of these shares each month thereafter, subject toacceleration in some instances upon achievement of certain performance goals orchanges in control of Versant.  Options expire ten years from the date ofgrant.

 

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Options are granted at an exercise price equal tothe fair market value of our CommonStock, as determined by the Board on the date of grant.

 

The5% and 10% assumed annual rates of stock price appreciation are required by therules of the Securities and Exchange Commission and do not reflect Versant’sestimate or projection of future stockprice growth. The percentage of total options granted to employees in the lastfiscal year is based on options to purchase an aggregate of  766,800 shares of Common Stock granted toemployees during fiscal 2002.

 
|                      |   | **Individual Grants** |   |             |   |   |            |   |           |
|---------------------------|--------|-----------------------|--------|------------------|--------|--------|-----------------|--------|----------------|
|                      |   | **Number**            |   |             |   |   |            |   |           |   |   |   |   |   |   |   |
|                      |   | **of Shares**         |   |             |   |   |            |   |           |   |   | **Potential Realizable Value** |   |
|                      |   | **of Common**         |   | **% of Total**   |   |   |            |   |           |   |   | **At Assumed Annual Rates** |   |
|                      |   | **Stock**             |   | **Options**      |   |   |            |   |           |   |   | **of Stock Price** |   |
|                      |   | **Underlying**        |   | **Granted to**   |   |   | **Exercise or** |   |           |   |   | **Appreciation for Option** |   |
|                      |   | **Options**           |   | **Employees in** |   |   | **Base Price**  |   | **Expiration** |   |   | **Term** |   |
| **Name**                  |   | **Granted**           |   | **Fiscal 2002**  |   |   | **Per Share**   |   | **Date**       |   |   | **5%** |   |   | **10%** |   |
| Nick Ordon(1)             |   | 50,000                |   | 6.52             | %      | $      | 1.60            |   | 2/27/12        |   | $ | 50,312 |   | $ | 127,499 |   |
| William  Shellooe(2) |   | 15,000                |   | 1.96             | %      | $      | 0.61            |   | 7/15/12        |   | 5,754 |   | 14,583 |   |
| Lee McGrath(1)            |   | 45,000                |   | 5.87             | %      | $      | 1.60            |   | 2/27/12        |   | 45,280 |   | 114,749 |   |
| Tom Miura(1)              |   | 45,000                |   | 5.87             | %      | $      | 1.60            |   | 2/27/12        |   | 45,280 |   | 114,749 |   |

 

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(1)             Under the termsapproved by the Compensation Committee, Mr. Ordon’s option for 50,000 shares,Mr. McGrath’s option for 45,000 shares, and Mr. Miura’s option for 45,000shares each vested as to 25% of the shares on November 27, 2002 and vestmonthly thereafter until vested in full. Messrs. Ordon, McGrath, and Miura weregranted 15,000, 15,000, and 12,500, respectively, in 2001, which were to vestin full on July 16, 2006, provided that vesting would be accelerated upon the achievementby the Company of certain quarterly profitability goals in 2002. Theprofitability goals were not met and the vesting was not accelerated.

 

(2)             Under the termsapproved by the Compensation Committee, Mr. Shellooe’s option for 15,000 sharesvested as to 100% of the shares on December 31, 2002, the date of histermination.

 

**AggregatedOption Exercises in Fiscal 2002 and Fiscal Year-End Option Values**

 

Noneof the Named Executive Officers exercised any options for our Common Stockduring fiscal 2002. The following table shows the number of shares of CommonStock subject to exercisable and unexercisable stock options held as of October31, 2002 by each of the Named Executive Officers. Also presented are values of“in-the-money” options, which represent the positive difference between theexercise price of each outstanding stock option and $0.53, the closing priceper share of our  Common Stock onOctober 31, 2002 on the Nasdaq National Market.

 
|             |   | **Number of Securities  Underlying Unexercised  Options at October 31, 2002** |   | **Value of Unexercised  In-the-Money Options  at October 31, 2002** |   |
|------------------|--------|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|
| **Name**         |   | **Exercisable**                                                               |   | **Unexercisable**                                                   |   | **Exercisable** |   | **Unexercisable** |   |
| Nick Ordon       |   | 525,000                                                                       |   | 50,000                                                              |   | — |   | — |   |
| Lee McGrath      |   | 87,270                                                                        |   | 72,730                                                              |   | — |   | — |   |
| William Shellooe |   | 143,000                                                                       |   | 15,000                                                              |   | — |   | — |   |
| Tom Miura        |   | 92,914                                                                        |   | 67,086                                                              |   | — |   | — |   |

 

**EmploymentContracts and Termination of Employment and Change-in-Control Arrangements**

 

We entered into anagreement on December 3, 1997 with Nick Ordon, our President and ChiefExecutive Officer, providing that: (i) Mr. Ordon would receive an annual salaryof $200,000; (ii) Mr. Ordon would be eligible for a bonus of $125,000 at theend of his first year of employment with Versant based upon the achievement ofcertain goals and objectives and for an additional bonus of $25,000 if heexceeded those goals and objectives; (iii) Mr. Ordon would be granted an optionto purchase 200,000 shares of our Common Stock at a price of $6.5625 per share,which would vest with respect to 25% of the shares on the first anniversary ofthe date of

 

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grant andthereafter for three years at the rate of 1/48th of the shares for each fullmonth that Mr. Ordon rendered services to Versant, such option to expire tenyears from the date of grant; (iv) Mr. Ordon would be granted an option topurchase 25,000 shares of our Common Stock at a price of $6.5625 per share,which would vest based upon the achievement of certain goals and objectives intwo equal annual increments; (v) in the event Versant was acquired during theterm of Mr. Ordon’s employment, 50% of Mr. Ordon’s unvested options outstandingon the date of acquisition would immediately vest; and (vi) Mr. Ordon wouldreceive certain other employee benefits.

 

**CompensationCommittee Interlocks and Insider Participation**

 

The currentmembers of the Compensation Committee are William Henry Delevati, who hasserved in that capacity the entire fiscal year; and Daniel Roberts, who haveserved in this capacity since May 2002. The members of the Compensation Committee during fiscal 2002 had neverbeen an officer or employee of the Company or any of its subsidiaries.  No executive officer of the Company servesas a member of the board of directors or compensation committee of any entitythat has one or more executive officers serving on the Company’s Board orCompensation Committee.

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management and Related Shareholder Matters**

 

**Securities Authorized for IssuanceUnder Equity Compensation Plans**

 

The following information is provided with respect toour equity compensation plans (including individual compensation arrangements) as of October 31, 2002:

 
| **Plan  Category**                                              |   | **Number of  Securities  to be issued upon  exercise of  outstanding options,  warrants and rights** |   | **Weighted-Average  exercise price of  outstanding  options, warrants  and rights** |   | **Number of  securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** |   |
|-----------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                            |   | (a)                                                                                                  |   | (b)                                                                                 |   | (c)                                                                                                                                                    |   |
| **Equity Compensation plans approved  by security holders**     |   | 4,201,025                                                                                            |   | 3.41                                                                                |   | 1,472,099                                                                                                                                              |   |
| **Equity Compensation plans not  approved by security holders** |   | —                                                                                               |   |                                                                                |   | —                                                                                                                                                 |   |
| **Total:**                                                      |   | 4,201,025                                                                                            |   | 3.41                                                                                |   | 1,472,099                                                                                                                                              |   |

 

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** **

**SecurityOwnership of Certain Beneficial Owners and Management**

 

The followingtable presents information regarding the beneficial ownership of each class ofthe Company’s capital stock as of January 21, 2003 by:

 

•                  each shareholder known by the Company to be thebeneficial owner of more than 5% of the Company’s Common Stock (which includescertain securities exercisable for or convertible into Common Stock) or SeriesA Preferred Stock;

 

•                  each of the Company’s directors;

 

•                  the Company’s Chief Executive Officer and theCompany’s three other executive officers whose salary and bonus for fiscal 2002was more than $100,000; and

 

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•                  all current directors and executive officers as agroup.

 

The percentage ofbeneficial ownership for the following table is based on 14,833,568 shares ofCommon Stock outstanding as of January 21, 2003 and 1,313,743 shares of SeriesA Preferred Stock outstanding as of January 21, 2003,respectively.  Each share of Series APreferred Stock is convertible, at the election of the holder, into two sharesof Common Stock.  Unless otherwiseindicated below, the persons and entities named in the table have sole votingand sole investment power with respect to all shares beneficially owned,subject to community property laws where applicable.  Shares of Common Stock subject to options or warrants or issuableupon conversion of outstanding Series A Preferred Stock that are currentlyexercisable or convertible within 60 days of January 21, 2003 are deemed to beoutstanding and to be beneficially owned by the person holding such options,warrants or convertible securities for the purpose of computing the number andpercentage ownership of Common Stock of such person but are not deemed to beoutstanding and to be beneficially owned for the purpose of computing thepercentage ownership of Common Stock of any other person.

 
|                                                                              |   | **Shares of  Common Stock   Beneficially Owned** |   | **Shares of  Preferred Stock  Beneficially Owned** |   |
|-----------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|----------------------------------------------------|--------|
| **Name of  Beneficial Owner**                                                     |   | **Number**                                       |   | **Percent**                                        |   | **Number** |   | **Percent** |   |
| **5% Shareholders:**                                                              |   |                                             |   |                                               |   |   |   |   |   |
| Vertex                                                                            |   | 4,009,428                                        | (1)    | 27.03                                              | %      | 1,137,687 | (2) | 86.60 | % |
| Royce &  Associates, Inc(3).                                                  |   | 814,600                                          |   | 5.49                                               |   | — |   | — |   |
| Joseph M. Cohen  Family Limited Partnership(4)                                    |   | 528,168                                          |   | 3.56                                               |   | 176,056 |   | 13.40 |   |
| Ajay Jain(5)                                                                      |   | 1,264,800                                        |   | 8.53                                               |   | — |   | — |   |
|                                                                              |   |                                             |   |                                               |   |   |   |   |   |
| **Executive Officers and Directors:**                                             |   |                                             |   |                                               |   |   |   |   |   |
| Nick Ordon(6)                                                                     |   | 581,666                                          |   | 3.78                                               |   | — |   | — |   |
| William  Shellooe(7)                                                              |   | 163,000                                          |   | 1.09                                               |   | — |   | — |   |
| Tom Miura(8)                                                                      |   | 134,307                                          |   | *                                                  |   | — |   | — |   |
| Lee McGrath(9)                                                                    |   | 117,829                                          |   | *                                                  |   | — |   | — |   |
| Bernhard  Woebker(10)                                                             |   | 260,373                                          |   | 1.75                                               |   | — |   | — |   |
| William Henry  Delevati(11)                                                       |   | 20,000                                           |   | *                                                  |   | — |   | — |   |
| Shyam  Rangole(12)                                                                |   | 15,000                                           |   | *                                                  |   | — |   | — |   |
| Daniel  Roberts(13)                                                               |   | 10,000                                           |   | *                                                  |   | — |   | — |   |
|                                                                              |   |                                             |   |                                               |   |   |   |   |   |
| **All Current Directors and Executive  Officers as a Group (9 persons)(14)** |   | 2,566,975                                        |   | 16.23                                              | %      | — |   | — |   |

 

----

  *      Represents less than 1%

 

(1)                Includes 100,000shares of Common Stock owned directly by Vertex Investments International (I)Inc. (“VI”), 489,767 shares of Common Stock owned directly by VertexInvestments International (III) Inc. (“VI-3”), 6,600 shares of Common Stockowned directly by Vertex Management Pte. Ltd. (“VM”), 1,805,892 shares ofCommon Stock issuable upon conversion of Series A Preferred Stock issued in theCompany’s July 12, 1999 Series A Preferred Stock financing (the “Financing”)owned by Vertex Technology Fund Ltd. (formerly Vertex Technology Fund Pte. Ltd.(“VTF”)), 902,946 shares of Common Stock issuable upon exercise of Common Stockwarrants issued in the Financing to VTF, 469,482 shares of Common Stockissuable upon conversion of Series A Preferred Stock issued in the Financingand owned by Vertex Technology Fund (II) Ltd. (“VTF II”) and 234,741 shares ofCommon Stock issuable upon exercise of Common Stock warrants issued in theFinancing to VTF II.  VM, VI, VI-3, VTFand VTF II are indirectly controlled by Singapore Technologies Pte. Ltd.  The address of VM, VI and VI-3 is 83 SciencePark Drive, #01-01/02 The Curie, Singapore 118256.  The address of VTF is 89 Science Park Drive, #02-09/12 TheRutherford, Singapore 118261.  Theforegoing information is based on the Schedule 13D dated July 23, 1999 filed byVTF, VTF II, VM, VI and VI-3 with the Securities and Exchange Commission.

 

(2)                Includes 902,946shares of Series A Preferred Stock issued in the Financing owned by VTF, and234,741 shares of Series A Preferred Stock issued in the Financing owned by VTFII.  The address of VTF and VTF II is 89

 

61

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Science Park Drive,#02-09/12 The Rutherford, Singapore 118261. The foregoing information is based on the Schedule 13D dated July 23,1999 filed by VTF and VTF II with the Securities and Exchange Commission.

 

(3)                The informationpresented is based on the Schedule 13G dated February 14, 2002 filed by Royce& Associates, Inc. with the Securities and Exchange Commission.  The address of Royce & Associates, Inc.is 1414 Avenue of the Americas, New York, NY 10019.

 

(4)                Shares of CommonStock beneficially owned includes 352,112 shares of Common Stock issuable uponconversion of Series A Preferred Stock issued in the Financing and 176,056shares of Common Stock issuable upon exercise of a warrant issued in theFinancing to the Joseph M. Cohen Family Limited Partnership.  Shares of Preferred Stock beneficially ownedreflects 176,056 shares of Series A Preferred Stock issued in the Financing tothe Joseph M. Cohen Family Limited Partnership. The address of the Joseph M.Cohen Family Limited Partnership is 70 East 55th Street, 16th Floor, New York,New York, 10022.

 

(5)                Represents sharesof Common Stock issued to Mr. Jain in connection with the Company’s acquisitionof all of the outstanding shares of capital stock of Mokume Software, Inc., aprivately held Delaware corporation (“Mokume”) pursuant to that certainAgreement and Plan of Reorganization dated as of November 19, 2002 by and amongthe Company, Mokume, VM Merger Corp., a Delaware corporation and wholly-ownedsubsidiary of the Company, and the stockholders of Mokume (the “MergerAgreement”).  Mr. Jain was President andChief Executive Officer and a director of Mokume.  All of the shares of the Company’s common stock issued to Mr.Jain are subject to vesting and repurchase restrictions, as provided in theMerger Agreement, a copy of which was filed as Exhibit 2.01 to the Company’sCurrent Report on Form 8-K filed with the Securities and Exchange Commission onNovember 27, 2002.  Mr. Jain isPresident of the Company’s Real-Time Solutions business unit.

 

(6)                Includes 541,666shares of Common Stock subject to options exercisable within 60 days of January21, 2003.  Mr. Ordon is President andChief Executive Officer of Versant.

 

(7)                Includes 158,000shares of Common Stock subject to options exercisable within 60 days of January21, 2003.  Mr. Shellooe was Senior VicePresident, Worldwide Field Operations until May 31, 2002 and remained as anemployee with the Company through December 31, 2002.  He is currently a member of Versants Board of Directors.

 

(8)                Includes 115,206shares of Common Stock subject to options exercisable within 60 days ofJanuary 21, 2003. Mr. Miura is Senior Vice President and Chief OperatingOfficer of Versant.

 

(9)                Includes 115,401shares of Common Stock subject to options exercisable within 60 days of January21, 2003.   Mr. McGrath is VicePresident, Finance and Administration and Chief Financial Officer and Secretaryof Versant.

 

(10)          Includes 10,000 sharesof Common Stock subject to options exercisable within 60 days of January 21,2003.  Mr. Woebker is a member ofVersant's Board of Directors.

 

(11)          Includes 20,000 sharesof Common Stock subject to options exercisable within 60 days of January21, 2003.  Mr. Delevati is a memberof Versant's Board of Directors.

 

(12)          Includes 15,000 sharesof Common Stock subject to options exercisable within 60 days of January21, 2003.  Mr. Rangole is a member of Versant'sBoard of Directors.

 

(13)          Represents 10,000 sharesof Common Stock subject to options exercisable within 60 days of January 21,2003.  Mr. Roberts is a member ofVersant's Board of Directors.

 

(14)          Includes 985,203 sharesof Common Stock subject to options exercisable within 60 days of January 21,2003.

 

62

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**Item13.  Certain Relationships and RelatedTransactions.**

 

Mr. Daniel Roberts has served as a director of Versantsince July 2001.  Since March 2000, hehas been Executive Vice President of Business Operations and Chief InformationOfficer of the PMI Group Inc. (PMI), a private mortgage guaranty insurancecompany, and between December 1997 and March 2000 he was its Senior VicePresident and Chief Information Officer. We entered into an agreement with PMI in October 2002 for the resale ofthird-party products, for which we recognized revenue in December 2002.  We received a payment of $1,011,790.91 inOctober of 2002 from PMI in connection with this transaction.

 

Except for compensation arrangements described whererequired above, and the arrangement with PMI, since November 1, 2002, there hasnot been, nor is there currently proposed, any transaction or series of similartransactions to which Versant was or is to be a party in which the amountinvolved exceeded or will exceed $60,000 and in which any director, executiveofficer or holder of more than 5% of Versant's Common Stock had or will have adirect or indirect material interest.

 

63

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**Item14.  Controls and Procedures.**

 

(a)                                  Basedon their evaluation as of a date within 90 days of the filing date of thisAnnual Report on Form 10-K, our Chief Executive Officer and the Chief FinancialOfficer have concluded that Versant’s disclosure controls and procedures (asdefined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of1934, as amended) are effective to ensure that information required to bedisclosed by Versant Corporation in reports that it files or submits under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

 (b)                            There were no significantchanges in our internal controls or in other factors that could significantlyaffect these controls subsequent to the date of their evaluation.  No significant deficiencies or materialweaknesses were detected in our internal controls, and, therefore, no corrective actions were taken.

 

**Item 15****.  Exhibits, Financial Statement Schedules, andReports on Form 8-K.**

 
| (a)     | 1.                        |   | The following financial statements are filed in Item  8 of this report on Form 10-K:                         |
|---------|---------------------------|--------|--------------------------------------------------------------------------------------------------------------|
|    |                      |   |                                                                                                         |
|    |                      |   | Reports of Independent Public Accountants                                                                    |
|    |                      |   | Consolidated Balance Sheets                                                                                  |
|    |                      |   | Consolidated Statements of Operations                                                                        |
|    |                      |   | Consolidated Statements of Shareholders’ Equity                                                         |
|    |                      |   | Consolidated Statements of Cash Flows                                                                        |
|    |                      |   | Notes to Consolidated Financial Statements                                                                   |
|    |                      |   |                                                                                                         |
|    | 2.                        |   | The following financial statement schedule is filed  at the end of Item 8 of this report on Form 10-K:       |
|    |                      |   |                                                                                                         |
|    |                      |   | Schedule II - Valuation and Qualifying Accounts and  Reserves                                                |
|    |                      |   |                                                                                                         |
|    | 3.                        |   | The exhibits filed herewith or incorporated by  reference are listed in the “Exhibit Index” below. |
|    |                      |   |                                                                                                         |
| **(b)** | **Reports  on Form 8-K.** |

 

On October 2, 2002, we filed a report on Form 8-Kdisclosing our announcement on September 30, 2002 of the approval of ourrequest to transfer the listing of our common stock from the Nasdaq NationalMarket to the Nasdaq SmallCap Market, effective October 1, 2002.

 

On November 27, 2002, we filed a report on Form 8-Kregarding our November 19, 2002 acquisition of Mokume Software, Inc., for2,424,000 shares of Versant common stock.

 
| (c)    | The exhibits filed herewith or incorporated by reference  are listed in the “Exhibit Index” below. |
|--------|--------------------------------------------------------------------------------------------------------------|
|   |                                                                                                         |   |   |
| (d)    | See Item 15(a)(2) above.                                                                                     |

 

 

64

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | VERSANT  CORPORATION                       |
|--------|--------------------------------------------|
|   |                                       |
|   |                                       |
|   | By:                                        | /s/ Lee McGrath |   |
|   | Lee McGrath                                |
|   | Vice  President-Finance and Administration |
|   |                                       |
|   | Date:  January 28, 2003               |

 

65

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**POWER OFATTORNEY**

 

By signing this Form 10-K below, I hereby appoint eachof Nick Ordon and Lee McGrath as my attorneys-in-fact to sign all amendments tothis Form 10-K on my behalf, and to file this Form 10-K (including all exhibitsand other documents related to the Form 10-K) with the Securities and ExchangeCommission.  I authorize each of myattorneys-in-fact to (1) appoint a substitute attorney-in-fact for himself and(2) perform any actions that he believes are necessary or appropriate to carryout the intention and purpose of this Power of Attorney.  I ratify and confirm all lawful actionstaken, directly or indirectly, by my attorneys-in-fact and by any properlyappointed substitute attorneys-in-fact.

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 
| **Name**                                                      |   | **Title** |                                              | **Date** |
|---------------------------------------------------------------|--------|-----------|---------------------------------------------------|----------|
|                                                          |   |      |                                              |     |
| PRINCIPAL EXECUTIVE OFFICER:                                  |   |      |                                              |     |
|                                                          |   |      |                                              |     |
| /s/ Nick Ordon                                                |   |      | President, Chief  Executive Officer and  Director |     | January 27, 2003 |
| Nick Ordon                                                    |   |      |                                              |
|                                                          |   |      |                                              |
|                                                          |   |      |                                              |     |
| PRINCIPAL FINANCIAL OFFICER AND  PRINCIPAL ACCOUNTING OFFICER |   |      |                                              |     |
|                                                          |   |      |                                              |     |
| /s/ Lee McGrath                                               |   |      | Vice President-Finance  and Administration        |     | January 27, 2003 |
| Lee McGrath                                                   |   |      |                                              |
|                                                          |   |      |                                              |     |
| ADDITIONAL DIRECTORS:                                         |   |      |                                              |     |
|                                                          |   |      |                                              |     |
| /s/ William Henry Delevati                                    |   |      | Director                                          |     | January 27, 2003 |
| William Henry Delevati                                        |   |      |                                              |     |
|                                                          |   |      |                                              |     |
| /s/ Shyam Rangole                                             |   |      | Director                                          |     | January 27, 2003 |
| Shyam Rangole                                                 |   |      |                                              |     |
|                                                          |   |      |                                              |     |
| /s/ Daniel L. Roberts                                         |   |      | Director                                          |     | January 27, 2003 |
| Daniel Roberts                                                |   |      |                                              |     |
|                                                          |   |      |                                              |     |
| /s/ William R. Shellooe                                       |   |      | Director                                          |     | January 27, 2003 |
| William Shellooe                                              |   |      |                                              |     |
|                                                          |   |      |                                              |     |
| /s/ Bernhard Woebker                                          |   |      | Director                                          |     | January 27, 2003 |
| Bernhard Woebker                                              |   |      |                                              |     |

 

66

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**Certification****Pursuant To18 U.S.C. Section 1350,As Adopted Pursuant ToSection 302 of The Sarbanes-Oxley Act of 2002**

 

I, Nick Ordon, certify that:

 

1.             I have reviewedthis annual report on Form 10-K of Versant Corporation (the"registrant");

 

2.             Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                                       Theregistrant's other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a.                           Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b.                          Evaluatedthe effectiveness of the registrant's disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the"Evaluation Date"); and

 

c.                           Presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.        Theregistrant's other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalentfunctions):

 

a.                              Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant's ability to record, process, summarizeand report financial data and have identified for the registrant's auditors anymaterial weaknesses in internal controls; and

 

b.                             Anyfraud, whether or not material, involving management personnel or otheremployees who have a

significant role in theregistrant’s internal controls; and

 

6.             The registrant'sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: January 29, 2003 |                    |
|------------------------|-------------------------|
|                   |                    |   |
| By                     | /s/ Nick Ordon          |   |   |
|                   | Nick Ordon              |   |
|                   | Chief Executive Officer |   |
|                        |                         |  |  |

 

67

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**Certification Pursuant To 18 U.S.C. Section 1350,As Adopted Pursuant ToSection 302 of The Sarbanes-Oxley Act of 2002**

 

I, Lee McGrath, certify that:

 

1.             I have reviewedthis annual report on Form 10-K of Versant Corporation (the"registrant");

 

2.             Based on myknowledge, this annual  report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

5.                                       Theregistrant's other certifying officers and I are responsible for establishingand maintaining “disclosure controls and procedures” (as defined in ExchangeAct Rules 13a-14 and 15d-14) for the registrant and have:

 

a.                           Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich the annual report is being prepared;

 

c.                               Evaluatedthe effectiveness of the registrant's disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the"Evaluation Date"); and

 

d.                             Presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.        Theregistrant's other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalentfunctions):

 

a.                              Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant's ability to record, process, summarizeand report financial data and have identified for the registrant's auditors anymaterial weaknesses in internal controls; and

 

b.                             Anyfraud, whether or not material, involving management personnel or otheremployees who have a

significant role in theregistrant’s internal controls; and

 

6.             The registrant'sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significatly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiences and material weaknesses.

 

 
| Date: January 29, 2003  |   |
|-------------------------|--------|
|                    |   |
| /s/ Lee McGrath         |   |   |
| Lee McGrath             |   |
| Chief Financial Officer |   |
|                         |        |  |

 

68

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**EXHIBIT INDEX**

 
|                |   |                                                                                                                                                                                   |   | **Incorporated  by Reference** |   |     |   |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|----------|--------|
| **Exhibit  Number** |   | **Exhibit  Description**                                                                                                                                                               |   | **Form**                       |   | **Date** |   | **Number** |   | **Filed  Herewith** |   |
| 2.01                |   | Agreement and Plan of Reorganization dated as of  November 19, 2002 by and among the Registrant, VM Merger Corp., Mokume  Software, Inc. and the stockholders of Mokume Software, Inc. |   | 8-K                            |   | 11/27/02 |   | 2.01 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 3.03                |   | Registrant’s Amended and Restated Articles of  Incorporation, filed with the California Secretary of State on July 24, 1996                                                       |   | SB-2                           |   | 07/17/96 |   | 3.03 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 3.05                |   | Registrant’s Amended and Restated Bylaws                                                                                                                                          |   | SB-2                           |   | 07/17/96 |   | 3.05 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 3.06                |   | Certificate of Amendment of Registrant’s Amended and  Restated Articles of Incorporation, filed with the California Secretary of  State on July 14, 1998                          |   | 10-QSB                         |   | 8/14/98  |   | 3.06 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 3.07                |   | Registrant’s Certificate of Determination filed with  the California Secretary of State on July 13, 1999                                                                          |   | 8-K                            |   | 07/12/99 |   | 3.01 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.01               |   | Registrant’s 1996 Directors Stock Option Plan, as  amended as of April 18, 2002, and related documents**                                                                          |   | S-8                            |   | 05/09/02 |   | 4.07 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.02               |   | Registrant’s 1996 Employee Stock Purchase Plan, as  amended as of April 18, 2002, and related documents**                                                                         |   | S-8                            |   | 05/09/02 |   | 4.06 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.03               |   | Registrant’s 401(k) Plan and addendum thereto**                                                                                                                                   |   | SB-2                           |   | 07/17/96 |   | 10.05 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.04               |   | Joint Venture Agreement dated as of July 26, 1995  between Registrant and ISAR-Vermogensverwaltung Gbr mbH*                                                                            |   | SB-2                           |   | 07/17/96 |   | 10.09 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.05               |   | Form of Indemnity Agreement entered into by  Registrant with each of its directors and executive officers                                                                              |   | SB-2                           |   | 07/17/96 |   | 10.10 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.06               |   | Form of Amendment to Versant Corporation Stock  Option Agreement**                                                                                                                     |   | SB-2                           |   | 07/17/96 |   | 10.14 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.07               |   | Lease Agreement dated November 25, 1996 between John  Arrillaga, Trustee et al. and Registrant                                                                                         |   | 10-KSB                         |   | 04/03/98 |   | 10.15 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.08               |   | Form of Letter Agreement dated October 22, 1997  between Registrant and its executive officers**                                                                                       |   | 10-KSB                         |   | 03/31/97 |   | 10.16 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.09               |   | Letter Agreement dated November 26, 1997 between  Registrant and Nick Ordon**                                                                                                          |   | 10-KSB                         |   | 03/31/97 |   | 10.18 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.10               |   | Note  Purchase Agreement dated October 16, 1998 between the Registrant and Vertex  Technology Fund Pte. Ltd.                                                                           |   | 10-KSB                         |   | 03/31/99 |   | 10.28 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.11               |   | Convertible Secured Subordinated Promissory Note  dated October 16, 1998 between the Registrant and Vertex Technology Fund Pte.  Ltd.                                                  |   | 10-KSB                         |   | 03/31/99 |   | 10.29 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.12               |   | Security Agreement dated October 16, 1998 between  the Registrant and Vertex Technology Fund Pte. Ltd.                                                                                 |   | 10-KSB                         |   | 03/31/99 |   | 10.30 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.13               |   | Registration Rights Agreement dated October 16, 1998  between the Registrant and Vertex Technology Fund Pte. Ltd.                                                                      |   | 10-KSB                         |   | 03/31/99 |   | 10.31 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.14               |   | Subordination Agreement dated October 16, 1998  between the Registrant and Vertex Technology Fund Pte. Ltd.                                                                            |   | 10-KSB                         |   | 03/31/99 |   | 10.32 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.15               |   | Common Stock and Warrant Purchase Agreement dated  December 28, 1998 between the Registrant and the parties listed on the  Schedule of Investors attached thereto                      |   | 10-KSB                         |   | 03/31/99 |   | 10.33 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.16               |   | Special Situations Fund Stock Warrant dated December  28, 1998                                                                                                                         |   | 10-KSB                         |   | 03/31/99 |   | 10.34 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.17               |   | Registration Rights Agreement dated December 28,  1998 between  the Registrant and the  parties listed on the Schedule of Investors attached thereto                              |   | 10-KSB                         |   | 03/31/99 |   | 10.35 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.18               |   | Preferred Stock and Warrant Purchase Agreement dated  June 28, 1999 between  the Registrant  and the parties listed on the Schedule of Investors attached thereto                 |   | 8-K                            |   | 07/12/99 |   | 10.01 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.19               |   | Form of Registrant’s Common Stock Purchase Warrant                                                                                                                                |   | 8-K                            |   | 07/12/99 |   | 10.02 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.20               |   | Debt Cancellation Agreement dated June 28, 1999  between Registrant and Vertex Technology Fund, Inc.                                                                                   |   | 8-K                            |   | 07/12/99 |   | 10.03 |   |   |   |
|                |   |                                                                                                                                                                                   |   |                           |   |     |   |   |   |   |   |
| 10.21               |   | Supplement dated June 28, 1999 to Registration  Rights Agreement among the Registrant and the parties listed on the Schedule  of Investors attached thereto                            |   | 8-K                            |   | 07/12/99 |   | 10.04 |   |   |   |

 

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|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------|--------|--------|--------|--------|--------|
| 10.22  |   | Registrant’s 1996 Equity Incentive Plan, amended as  of April 18, 2002**                                               |   | S-8    |   | 05/09/02 |   | 4.06   |   |   |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 10.23  |   | Public Relations Firm Agreement dated November 1,  1999 by and between the Registrant and Liolios Group, Inc.               |   | 10-KSB |   | 03/30/00 |   | 10.42  |   |   |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 10.24  |   | Business Loan Agreement (Asset Based) dated June 28,  2001 by and between the Registrant and Greater Bay Bank.              |   | 10-Q   |   | 08/14/01 |   | 10.50  |   |   |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 10.25  |   | Commercial Security Agreement dated June 28, 2001 by  and between the Registrant and Greater Bay Bank                       |   | 10-Q   |   | 08/14/01 |   | 10.51  |   |   |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 10.26  |   | Business Loan Agreement (Asset Based) dated December  14, 2001 by and between the Registrant and Greater Bay Bank           |   | 10-Q   |   | 03/18/02 |   | 10.52  |   |   |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 10.27  |   | Loan and Security Agreement dated April 18, 2002 by  and between the Registrant and Pacific Capital Funding                 |   | 10-Q   |   | 06/14/02 |   | 10.53  |   |   |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 10.28  |   | Employment Offer Letter Agreement dated as of  November 19, 2002 by and between the Registrant and Ajay Jain**              |   |   |   |     |   |   |   | X      |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 10.29  |   | Non-Competition Agreement dated as of November 19,  2002 by and among the Registrant, Ajay Jain and Mokume Software, Inc.** |   |   |   |     |   |   |   | X      |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 16.01  |   | Letter dated May 23, 2002 from Arthur Andersen LLP  regarding change in Registrant’s Certifying Accountant             |   | 8-K    |   | 5/24/02  |   | 16.01  |   |   |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 16.02  |   | Letter dated May 23, 2002 from Arthur Andersen LLP  regarding change in Registrant’s Certifying Accountant             |   | 8-K    |   | 6/26/02  |   | 16     |   |   |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 21.01  |   | Subsidiaries of the Registrant                                                                                              |   |   |   |     |   |   |   | X      |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 23.01  |   | Consent of KPMG LLP                                                                                                         |   |   |   |     |   |   |   | X      |   |
|   |   |                                                                                                                        |   |   |   |     |   |   |   |   |   |
| 23.02  |   | Note regarding Absence of Consent of Arthur Andersen  LLP                                                                   |   |   |   |     |   |   |   | X      |   |

 

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*                                         Confidentialtreatment has been granted with respect to certain portions of this agreement.Such portions have been omitted from the filing and have been filed separatelywith the Securities and Exchange Commission.

 

**           Management contractor compensatory plan.

 

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