**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, 2003.**                                                                                                                                                                                                                                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **or**     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **o**      |   | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                                            |
|       |   | **for the transition period from                                 to                                 .** |

 

**Commission file number: 0-28540**

 

**VERSANT CORPORATION**

(Exact name of registrant asspecified 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)                                                   |
|                                                                                                   |
| **(510) 789-1500**                                                                                     |
| (Registrant’s  telephone number, including area code)                                             |
|                                                                                                   |
| 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** |

 

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

 

Indicate by check mark whether the Registrantis an accelerated 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. o

 

The aggregate market value of the outstandingcommon stock held by non-affiliates of the Registrant as of April 30, 2003(the last business day of the registrant’s most recently completed secondfiscal quarter), (based on the closing price of $0.76 per share on the NasdaqSmallcap Market on April 30, 2003) was approximately $8,556,514.  This amount excludes 2,383,755 shares ofcommon stock held by directors, officers and certain shareholders of theRegistrant as of April 30, 2003. 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 thatsuch person is controlled by or is under common control with the Registrant.

 

As of January 1, 2004, there wereoutstanding 14,790,325 shares of the Registrant’s common stock, no par value.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the Registrant’s definitive proxystatement for its 2004 Annual Meeting of Stockholders are incorporated byreference in Part III of this report on Form 10-K.

 

 

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**VERSANT CORPORATION**

**ANNUAL REPORT ON FORM 10-K**

**For the Fiscal Year Ended October 31,2003**

 

**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 And Issuer Purchases of Equity Securities. |   |
|         |   |                                                                                                                   |   |
| 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.                                 |   |
|         |   |                                                                                                                   |   |
| Item 9A      |   | Controls and Procedures                                                                                                |   |
|         |   |                                                                                                                   |   |
|         |   | **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.     |   | Principal Accountant Fees and Services                                                                                 |   |
|         |   |                                                                                                                   |   |
|         |   | **PART IV**                                                                                                            |   |
|         |   |                                                                                                                   |   |
| Item 15.     |   | Exhibits,  Financial Statement Schedules and Reports on Form 8-K.                                                      |   |
|         |   |                                                                                                                   |   |
| Signatures   |   |

 
| Certifications                                                                                                                                                                                                                                                                                                                                                |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Versantâ  and enJinâ  are  registered trademarks of Versant in the United States and/or other countries,  and VDSTM  Versant JDOTM  and VRTFTM are trademarks of Versant.  Other parties’ marks (such as, IBM’s WebSphere and BEA’s  WebLogic) are the property of their respective owners and should be treated  as such. |

 

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**CAUTION REGARDING FORWARD-LOOKING STATEMENTS**

 

*This Form 10-K contains forward-looking statements within the meaningof Section 21E of the Securities Exchange Act of 1934 and Section 27Aof the Securities Act of 1933.  Theseforward-looking statements are based on our current expectations about ourbusiness and industry and reflect our beliefs and assumptions based uponinformation that is reasonably available to us at the date of this report.  In many cases you may identify theseforward-looking statements by words such as “will,” “should,” “may,” “might,“believes,” “anticipates,” “expects,” “intends,” “estimates” and similarexpressions.  These forward-lookingstatements include, among other things, projections of our future financialperformance and 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 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’sDiscussion and Analysis of Financial Condition and Results of Operation - RiskFactors,” which you should read carefully. We undertake no obligation to revise or update any forward-lookingstatements in order to reflect events or circumstances that may arise or occurafter the date of this report or for any other reason.  Readers are urged to carefully review andconsider the various disclosures made by us in this report and in our otherreports filed with the Securities and Exchange Commission that attempt toadvise interested parties of the risks and factors that may affect ourbusiness.*

 

**PART I**

 

**Item 1. Business.**

 

**Overview**

 

We are a leading provider of object-orienteddata management and data integration software that forms a critical componentof an enterprise’s real-time computing infrastructure.  Companies use our solutions to solve complexdata management and integration problems. To address these problems, we design, develop, market and supportdatabase management systems, data access and integration products and datareplication products.  We also providerelated product support, training and consulting services to assist users indeveloping and deploying applications based on our products.  We were incorporated in California inAugust 1988 as Object Sciences Corporation and completed the initialpublic offering of our common stock in July 1996. In 1999 we issued SeriesA Preferred Stock to private investors in private offerings.  Our principal executive offices are locatedat 6539 Dumbarton Circle, Fremont, California 94555 and our telephone numberis  (510) 789-1500.  Our website can be found at www.versant.com.

 

***Proposed Merger withPoet Holdings, Inc.***

 

On September 27, 2003, we entered intoan Agreement and Plan of Merger, or merger agreement, with PoetHoldings, Inc., a publicly held developer of object database managementand e-commerce software whose stock is traded on the Frankfurt Stock Exchange.The signing of the merger agreement was publicly announced on September 29,2003 in a press release and in a report on Form 8-K that we filed with theSecurities and Exchange Commission on September 29, 2003.  The merger agreement provides that, subjectto the satisfaction of certain conditions, a wholly owned subsidiary of Versantwill merge with and into Poet, which will result in Poet becoming awholly-owned subsidiary of Versant and in Poet’s stockholders and stock optionholders becoming stockholders and option holders of Versant, respectively.

 

Under the terms of the merger agreement, uponconsummation of the Merger, each outstanding share of Poet common stock will beconverted into and exchanged for 1.4 shares of Versant common stock, and theoutstanding options and warrants to purchase Poet common stock will beexchanged for options to purchase shares of Versant common stock at the sameexchange ratio. If the proposed merger with Poet had occurred onSeptember 27, 2003 (the date the merger agreement was signed) then, basedon the number of Versant and Poet shares that were outstanding on that date,and assuming each outstanding share of Versant’s Series A preferred stockis converted in connection with the merger into three shares of Versant commonstock as contemplated by the merger agreement, in the merger Poet’sstockholders would be issued Versant common stock representing approximately45% of the shares of Versant common stock that would be outstanding immediatelyafter the merger, and the shares of Versant common stock issued to Poetstockholders and issuable under Versant stock options issued to Poet optionholders in the merger would together represent approximately 42.7% of Versant’spost-merger

 

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shares computed on a fully-diluted basis (taking into account Versant’soutstanding options and warrants, including the Versant options into whichPoet’s options are converted in the merger).

 

The merger agreement calls for certainchanges in Versant’s existing corporate structure.  First, it calls for Versant to reduce the size of its Board ofDirectors from eight to five directors upon effectiveness of the merger withPoet, with Versant’s board of directors immediately after consummation of themerger to be composed of two directors from Poet, Jochen Witte and Herbert May,and three directors from Versant, who will be Nick Ordon, Versant’s ChiefExecutive Officer, and two other incumbent Versant directors, Uday Bellary andWilliam Henry Delevati.  In addition, itis currently a condition to consummation of the merger that Versant’s articlesof incorporation be amended to: (i) increase the authorized number ofVersant’s common shares from 45,000,000 to 75,000,000 shares;(ii) increase the number of shares of Versant common stock issuable uponthe conversion of each share of Versant’s Series A preferred stock fromtwo to three common shares; (iii) cause each outstanding share ofVersant’s Series A preferred stock to be automatically converted intoshares of Versant common stock immediately after effectiveness of the merger atthe increased conversion rate described in (ii) above; (iv) providethat the merger will not trigger the liquidation preference rights of Versant’sSeries A preferred stock; (v) require that at least 80% of Versant’sdirectors then in office approve certain corporate transactions or any changein the authorized number of Versant’s directors; and (vi) provide that theamendment described in clause (v) cannot be changed for 12 monthsafter consummation of the merger without the approval of at least 80% ofVersant’s directors then in office.

 

Versant’s board of directors believes thatthe proposed merger with Poet will enable the combined post-merger company touse Versant and Poet’s complementary strengths in a manner that will affordVersant greater opportunities for revenue growth and profitability.  Poet shares Versant’s background andexperience in the development and marketing of object database managementsoftware.  However Poet markets itsobject database management products to different market segments than does Versant.  In addition to its FastObjects databasemanagement products, Poet offers its X-Solutions and eSupplier Solutionselectronic catalog product lines, which enable e-commerce vendors to build andmanage on-line catalogs.  Although Poetis a U.S. corporation, its management team is based in Germany and most of itsoperations and sales are based in Europe, and the proposed merger offersVersant the opportunity to obtain a stronger and more experienced Europeansales and distribution infrastructure. Poet also has significantly greater cash reserves than Versant, whichwill be critical in providing opportunities for future growth.  Based on its analysis of Poet’s business andmarket position, Versant believes that the proposed merger with Poet will offerthe combined company several potential benefits, including:

 

•                                          theopportunity to increase Versant’s leadership position in the object databasemanagement market;

 

•                                          theability to diversify Versant’s customer base and product line;

 

•                                          improvedinternational sales and marketing capabilities;

 

•                                          increasedworking capital;

 

•                                          potentialsynergies and  efficiencies that mayreduce operating expenses;

 

•                                          astrengthened management team; and

 

•                                          overallstronger competitive advantages.

 

In order for Versant and Poet to complete theproposed merger, several conditions must first be met, including the conditionthat Versant’s and Poet’s stockholders each approve and adopt the mergeragreement and the merger. In addition, as an integral part of the proposal toapprove the merger, Versant’s stockholders must also approve the issuance ofshares of Versant common stock and options to purchase Versant common stock inthe merger and the proposed amendments of Versant’s articles of incorporationsummarized above, which will take effect only if the merger isconsummated.  Versant and Poet currentlyanticipate that they will hold special meetings of their stockholders toconsider proposals to approve the merger and related matters in March 2004.  If the merger agreement with Poet isterminated without consummation of the merger in certain circumstances, thenPoet or Versant may become obligated to pay the other party certain terminationfees, ranging from $500,000 to $1,000,000.

 

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***Overviewof Products and Services***

 

We provide sophisticated data management,data access and data integration software solutions designed to address thecomplex data management needs of enterprises. Our products are typically deployed to manage real-time transactionaldata and to manage meta-data for business systems and are used primarily bylarger enterprises, such as telecommunications carriers and financial servicescompanies, which have significant large-scale data management requirements.  Our customers’ data management needs caninvolve many business functions, ranging from management of the use and sharingof a company’s internal enterprise data to the processing of externallyoriginated information such as customer enrollment, billing and payment transactiondata.  Our solutions have also been usedto solve complex data management issues such as fraud detection, risk analysisand yield management.  Our data accessproducts are meant to deliver enterprise class data access to a variety of datamanagement systems, including our own. Finally, our data integration product is used to tie a company’senterprise planning systems with its physical execution systems.

 

Our initial flagship product, VDS (formerlyODBMS), is a sixth generation object database management system that combinesnative support for object-oriented languages with high performance databasefunctionality and client-server architecture. VDS enables users to store, manage and distribute information that webelieve often cannot be supported effectively by traditional databasetechnologies, including information of the following types:

 

•                  real-timedata, such as graphics, images, video, audio and unstructured text;

 

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

 

•                  meta-data,data aiding integration of diverse systems, and workflow information, whichtaken together enable the construction of systems that integrate diversesystems and add new functionality, often making it available over the Internet.

 

VDS is also the foundation for our e-businessproduct suite, Versant enJin.  VersantenJin is a Java development and runtime platform designed to enhanceperformance and scalability of Java 2 Enterprise Edition, or J2EE, compliantapplication servers such as IBM WebSphere and BEA WebLogic.  Versant enJin extends the functionality andpower of VDS to Internet-based transactions by enabling our object managementtechnology to drive J2EE-based applications. We have recently announced ourJava Data Objects (JDO) product, a data access tool that enables enterpriseapplications to efficiently access data from both object and relationaldatabases which complies with J2EE standards.

 

Our Versant Real-time Framework, or VRTF,data integration product, released in fiscal 2003, is a comprehensive frameworkfor delivering real-time solutions that bridge the gap between the planning andexecution functions of an enterprise. VRTF enables a company’s conventional enterprise planning systems toaccess and integrate data from its execution functions, such as plant-floor manufacturing and shipping, andphysical security systems, which historically have not been adequatelyintegrated into ERP computing systems.

 

In addition to our product offerings, toassist users in developing and deploying applications based on VDS, VersantenJin, VRTF and JDO, we offer a variety of services, including consulting,training and technical support services. We also offer a dedicated consulting practice for IBM WebSphere customers.  Under an agreement signed in late 2000 andrenewed recently in August 2003, we allocate certain of our consultants toIBM and both IBM and Versant sales representatives sell these consultants’services.

 

***Benefitsof our Solutions***

 

Our VDS, Versant enJin and Versant JDOproducts provide customers the following benefits for specialized datamanagement:

 

•                  *HighPerformance*.  Ourobject-based architecture provides direct access or navigation to storedobjects.  Our balanced client-serverarchitecture enhances performance by efficiently distributing processingburdens between clients and servers to leverage the processing power ofnetworked computers.

 

•                  *HighlyScalable Support for Distributed Computing*.  Through object-level operations,compatibility with Web browsers and other design features, our products can bescaled from small workgroup operations to thousands of users over wide areanetworks 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

 

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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 leadingobject-oriented software development languages - C++ and Java.  This support facilitates rapid and flexibleapplication development and maintenance and the evolution of complex, dynamicapplications that closely model real-world systems and processes.

 

•                  *Support forComponent Architectures*. Versant enJin integrates with leading J2EE application servers,including the IBM WebSphere and BEA Weblogic application servers. Theseapplication servers enable users to build and deploy J2EE-based applicationsdirectly to Versant enJin to gain the inherent productivity and performanceadvantages of the underlying Versant object database.

 

•                  *Integrationwith Users’ Existing Information Systems*.  Versant products operate on a wide range of server platforms:including UNIX platforms from Sun Microsystems, Hewlett-Packard, IBM, Compaqand Silicon Graphics; Linux platforms from Red Hat; and Microsoft Windows andNT platforms. In addition, Versant-based applications can interoperate withinformation stored in relational database management, enabling theseapplications to complement the strengths of relational database managementsystems structured applications.

 

**Fiscal2003 Developments and Strategy**

 

During fiscal 2003, we continued to focus ourefforts on seeking revenue from data management and data access products, VDSand Versant enJin and from our consulting services.  In fiscal 2003 VDS and, to a lesser degree, Versant enJin, werethe major drivers of our license revenues and a key focus of our marketingefforts.

 

In fiscal 2003, we derived a majority of ourrevenue from our services programs.  OurIBM WebSphere consulting business grew substantially in each quarter of 2003over the corresponding quarter of the previous year.  Our services programs, including our WebSphere program, areintended to produce incremental revenue, particularly from sales of VersantenJin, as well as to serve as an additional channel for generating new productrevenue. We believe that our services program will also ultimately help usgenerate additional service and product revenues.

 

In 2003, the telecommunications industrycontinued to be a very significant vertical market segment for us.  Our products are used in thetelecommunications industry in such strategic distributed applications asnetwork 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, technology andhealth care.  In the future we intend tocontinue to build on our current customer base, as we believe that thetelecommunications and financial services industries will continue be majorusers of application servers. We also expect the government and defenseindustry markets to contribute significantly as many of the applications indevelopment in those sectors reach deployment stage.

 

During the first quarter of fiscal 2003 welaunched Versant Real-time Framework, or VRTF, our first specialized dataintegration product.  VRTF deliversintegration between an enterprise’s execution systems and planning systems.Currently, VRTF is sold exclusively as a private-labeled product through thirdparty distribution channel relationships with physical execution systemvendors.

 

In order to accelerate the adoption of ourspecialized object-oriented data management system, VDS, and increase ourportfolio of data access products, in the fourth quarter of fiscal 2003 wereleased an industry standards-based product, Versant JDO. Versant JDO, inconjunction with our alliances with third-party JDO providers (such asSolarMetric) will provide an open data access layer that can expand acustomer’s choices for data management.

 

To accomplish our goals of increasing salesof VDS and extending our sales to the application server market through VersantenJin and Versant JDO, in fiscal 2003 we continued our research and developmentefforts with respect to these products. VDS and Versant enJin enhancements developed in fiscal 2003 includesupport of the Java Connector Architecture Standard, increased scalability andreliability, support of the Java Data Objects standard and an increase in thenumber of supported operating system platforms. In fiscal 2003 we also releasedour two new products, Versant JDO and Versant Real-time Framework. Both thesenew products deliver functionality that broadens our reach within an enterpriseand enables us to keep pace with emerging standards.

 

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**Productsand Services**

 

***Versant DeveloperSuite (VDS)***

 

VDS, a sixth generation object databasemanagement system, is designed to support multi-user, commercial applicationsin distributed environments.  Theobject-oriented, balanced client-server architecture of VDS provides the basisfor high-performance, scalable distributed applications.  We believe that VDS offers performancesuperior to that of relational database management systems, particularly forcomplex data applications, for which VDS has the capability of processing awide variety of abstract data types in a highly concurrent, high performancemanner.  VDS is designed to integrate upto 65,000 databases connected over a like number of locations on a variety ofhardware and software platforms.  Eachdatabase has a theoretical storage capacity of 4.6 million terabytes, an amountfar beyond the actual capacity of most existing operating systems.  VDS implements a variety of databasefeatures, 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 reducethe time needed to develop applications for their data management systems andimprove system performance.  Withversion 6.0 of VDS, we bundle several components, including the core objectdatabase management system, C++ and Java language interfaces, XML for importand export of data into the database and asynchronous replication services toprovide updates among distributed Versant databases.  We believe that by bundling these components with VDS we enhanceour solution and make it easier for our customers to deploy these components.

 

***Versant enJin***

 

Versant enJin is designed to acceleratee-business applications within the application server environment, to simplifydevelopment of new Java or e-business applications and to provide reliabilityfor the management of objects within the application server environment.  Specifically, Versant enJin enables users todeploy Java-based applications using Java 2Enterprise Edition, or J2EE, technologies, such as Enterprise JavaBeans, in applications requiring storage and access of complex graphical,navigational, and hierarchical data models, which enables our customers tospeed up the performance and enhance the scalability of these applications. Theuse of such complex object models is desirable but not directly supported inJ2EE.  Versant enJin addresses thisproblem by providing transparent persistence for Java objects within theapplication server and web server tiers, thereby enabling J2EE-basedapplications to enjoy the benefits of these object models. Versant enJin iscomprised of VDS plus the J2EE integration specific to the application serverplatform.  Versant enJin supports theIBM WebSphere and BEA WebLogic application servers

 

***Versant SQL Suite***

 

VDS and Versant enJin allow users a choice ofaccess methods for querying and manipulating data in the Versant objectdatabase management 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 FaultTolerant Server***

 

For highly reliable operations inmission-critical environments, we offer the Versant Fault Tolerant Server.  This product provides 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.

 

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***High AvailabilityBackup Solution***

 

The High Availability Backup Solution enablesVDS and Versant enJin to use the mirroring and backup features of otherenterprise storage systems to take an online backup of very large data volumeswithin seconds, without impacting transaction response times.

 

***Versant JDO***

 

Versant JDO is a data access tool thatenables enterprise applications to efficiently access data from Versant ObjectDatabase. It complies with the Java Data Objects standard and integrates withthird party JDO toolsets.  It isdesigned to offer portable data access and open approach to developingapplications. Versant JDO is a high-performance implementation that delivershigh-speed data access for object data management.

 

***Versant Real-timeFramework (VRTF)***

 

VRTF is a data integration product thatprovides a framework for utilization of real-time software solutions thatconnect an enterprise’s centralized planning systems to its execution systems,enabling enterprises to obtain and integrate important data that often has notbeen effectively incorporated in planning efforts.  It represents the first product released as part of our real-timesolutions initiative.  VRTF consists ofan integrated transaction manager and a suite of agents that connect the VRTFto the targeted systems; planning systems such as enterprise resource planning(ERP), and execution systems, such as physical security or plant floor systems.The integrated transaction manager is responsible for overall reliableoperation of the framework. Each agent interacts with the targeted system aswell as with the transaction manager. A configuration-time wizard enablesintegration of new systems and specification of detailed transactions via a webbrowser. For monitoring and debugging purposes, a browser is used to access aweb user interface that shows the operational state of the VRTF. Version 3.0also adds capabilities for web services and business process modeling toaccommodate enterprise to physical system real-time requirements.  VRTF is currently sold through third-partyresellers as a private-labeled product.

 

***Licensing andPricing of Products***

 

We license our products to end-users bothdirectly, through our own sales force, and indirectly, through authorized,value-added resellers, systems integrators and distributors.

 

When we license our core products (VDS,enJin, and JDO) directly to end-users, we do so primarily through two types ofperpetual licenses—development licenses and deployment licenses.  Development licenses are typically sold on aper seat basis and authorize a customer to develop an application program thatuses VDS or Versant enJin.  Before acustomer may deploy an application it has developed under our developmentlicense, we require it to purchase deployment licenses from us based on thenumber of computers connected to the server that will run the application usingour database management system.  If the customerwishes to install several copies of an application it has created under adevelopment license, then separate deployment licenses are required for eachserver computer and each client computer that will run that application.  For certain applications, we offerdeployment licenses priced on a per user basis.  Pricing of VDS and Versant enJin licenses varies according toseveral factors, including the number of computer servers on which theapplication will run and the number of users that will be able to access theserver at any one time.  Customers mayelect to simultaneously purchase development and deployment licenses for anentire project.

 

End-user license fees for our development anddeployment licenses can range from the low thousands of dollars to,occasionally, several million dollars depending on a number of variables.  These variables include, but are not limitedto, the number of users (specific number or unlimited), the number ofdeployments, the time frame of deployments, whether the deployments are to beprepaid or paid on an as needed basis, the type of operating system(s), thetype of server(s) and whether the servers are single or multiprocessormachines.  We provide alternativepricing for 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-usersthrough authorized value-added resellers, systems integrators anddistributors.  Value-added resellersgenerally purchase development licenses from us on a per seat basis on termssimilar to the terms of development licenses we sell directly to end-users,although the price may vary.  Under sucha license a typical value-added reseller develops an application incorporatingVersant’s core product  and then licensesthat application to a customer. Value-added resellers are authorized by us to sub-license deploymentcopies of our core products  toend-users, bundled together with the value-added resellers’ applications.  Deployment license pricing for sales throughvalue-added resellers is generally based either on a percentage of the totalprice charged by the value-added reseller to the end-user customers or on a

 

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percentage of our list prices. Systems integrators generally purchaselicenses from us that entitle them to sublicense our software products to theircustomers for use in systems designed or built by the systems integrator.  Deployment license pricing for sales tosystems 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 include significantdiscounts off our typical end-user license fees.

 

Versant does not currently license our VRTFproduct directly to end-users.  To date,it has been marketed only as a private-labeled product sold through physicalexecution systems vendors to whom Versant will provide integration, trainingand other consulting services.

 

**Services**

 

We offer customers training, consulting andmaintenance and technical support services. We provide a variety of training and consulting services to assistcustomers in the design, development, education and management of our coreproducts as well as 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 product extensions.  Depending on the nature and complexity of thecustom development services requested, these services may be performed by ourconsulting employees or by third-party integrators that have joined our IGNITE!Partner Program and received training from us.

 

Our maintenance and technical supportservices are generally available at an annual fee that varies depending on thetype of support the customer requires. Maintenance and support contracts, which typically have twelve-monthterms, are offered concurrently with the initial license of our product and entitlethe 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 fordevelopment and/or deployment in a wide range of applications.  A substantial amount of our sales are forapplications in the telecommunications, financial services, healthcare,technology and defense sectors.  Many ofour customers have licensed multiple copies for use in different applications.

 

In recent years we have experiencedconcentration of our sales to certain customers. In fiscal 2003, IBM, throughour WebSphere consulting practice, represented 19% of our total revenue and in2002, it represented 14% of our total revenue. Two customers accounted for 28% and 11% of our total 2001 revenue in theten months ended October 31, 2001.

 

Our future performance will depend insignificant part on the continued growth of the use of VDS and Versant enJin intelecommunications, defense, and financial market applications and thecontinued acceptance of our products within the telecommunications andfinancial services industries.  Althoughwe anticipate that our new real-time business will eventually increase ourability to market our products to an increased number of industries, there canbe no assurance that our real-time initiative will succeed in enlarging ourcustomer base.  Consequently, thefailure of our products to perform favorably in and become an acceptedcomponent of telecommunications, defense, Internet-based or financial servicesapplications, or in new real-time applications, or a slower than expectedincrease or a decrease in the volume of sales of our products and services totelecommunications, defense, Internet-based or financial services companies orto markets targeted by our new real-time business, could have a materialadverse effect on our business.

 

**Salesand Marketing**

 

We market and sell our products in the UnitedStates principally through our direct sales force and through value-addedresellers and systems integrators. Internationally, we market and sell through our direct sales force,value-added resellers and distributors.

 

*Direct Sales.*Our direct sales organization isbased at our corporate headquarters in Fremont, California and at our otherregional offices around the world.  Thedirect sales organization includes our field sales personnel, who areresponsible for account management, and systems engineers, who answer technicalquestions and assist customers in running benchmarks against competitiveproducts and developing prototype applications.

 

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*Indirect Sales.*  An important part of our future sales strategy will be thecontinued development of indirect distribution channels, such as value-addedresellers, systems integrators and foreign distributors.  We expect to continue our focus on indirectsales channels.  Our existing real-timeproduct, VRTF, is currently marketed globally by our commercial sales partners.Value-added resellers typically build application programs in which they embeda deployment copy of VDS or Versant enJin. Systems integrators may include our products with those of others, toprovide 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 products theyproduce or that are produced by third parties which compete with our products.

 

*Marketing. *Ourmarketing programs and personnel are aimed at audiences with the goal ofbuilding visibility and generating leads for Versant’s business.  One of our current key marketing initiativesis to build customer awareness and market leadership for Versant in thereal-time business space. Our marketing programs include our efforts atcultivating media and analyst relations, fostering valuable investorcommunications, speakers’ programs, online marketing, partner marketingprograms and participation in conferences and tradeshows.

 

*Sales Process*.  The sales cycle for our products to new, large enterprisecustomers can exceed six months and may extend to a year or more.  For existing customers with successfullydeployed applications, sales cycles for new applications of our core productsare generally much shorter.  Our VRTFreal-time product, which we have recently begun to distribute through ourchannel partners, has thus far exhibited a generally shorter sales cycle.During the sales cycle, meetings involving both technical and management staffare conducted frequently at the prospective customer’s site and at ourheadquarters.  As part of their productselection process, our prospective customers typically perform a detailedtechnical evaluation or benchmark of our object-based technologies, oftendirectly comparing them to competitive products.  Upon completion of the evaluation, a customer who chooses oursolution 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,a customer typically will purchase deployment licenses.  Deployment licenses are priced based uponthe number of users, in the case of a sale to an end-user customer, or as apercentage of the customer’s revenue generated from the sale of its application,in the case of a sale to a value-added reseller or distributor.  Customers may purchase additional deploymentlicenses as needed, without further deliveries from us, providing additionalhigher-margin revenue over an extended period at a relatively low incrementalcost to us.  The amount and price ofdeployment licenses generally exceed the amount and price of earlierdevelopment licenses.

 

*Shipping and Backlog*.** **All software is shipped from our Fremont facility and isdelivered to the customer upon receipt of an approved order and a signed licenseagreement.  We typically do not have amaterial backlog of unfilled license orders at any given time, and we do notconsider backlog to be a meaningful indicator of our future performance.

 

*International Sales and Marketing*.  Our foreign sales are recorded bysubsidiaries located in Germany and the United Kingdom who also sell ourproducts through distributors, value added resellers, as well as directly toend-users.  Our revenues frominternational sales were $5.4 million in the year ended October 31, 2003,$6.4 million in the year ended October 31, 2002, and $6.5 million in theten months ended October 31, 2001.

 

**Researchand Development**

 

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

 

•                  ongoingefforts to improve the  performance andscalability of our core products;

 

•                  expandingthe features and range of products for our new real-time business;

 

•                  supportingJ2EE technologies and continuing to leverage Java for e-business applications;

 

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•                  improvingthe integration 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 and development expenses wereapproximately $4.3 million in the year ended October 31, 2003, $5.8million in the year ended October 31, 2002 and  $5.5 million in the ten months ended October 31, 2001. Todate, all research and development expenditures have been expensed as incurred.

 

To date, VDS and Versant have been almostentirely developed internally 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 technologies such as:

 

•                  object-orientedsoftware development, including Java;

 

•                  relationaldatabase technology;

 

•                  platformengineering;

 

•                  designand integration;

 

•                  large-scalerun-time environments; and

 

•                  middlewaretechnologies.

 

We perform some of our porting andenhancement engineering work in our development office in India. Versant India,our wholly owned subsidiary, had 35 employees as of October 31, 2003 andoccupies an approximately 6,500 square foot facility leased in Pune, India.

 

We believe that our future results willdepend on our ability to improve our current technologies and to develop newproducts and product enhancements on a timely basis.  The market for our products and services is characterized bychanging customer demands, rapid technological change and frequentintroductions of new products and product enhancements.  Customer requirements for products canchange rapidly as a result of innovations or changes within the computerhardware and software industries, the introduction of new products andtechnologies (including new hardware platforms and programming languages) andthe emergence, evolution or widespread adoption of industry standards.  The actual or anticipated introduction ofnew products, technologies and industry standards can render existing productsobsolete or unmarketable or result in delays in the purchase of theseproducts.  As a result, the life cyclesof our products are difficult to estimate. We have in the past experienced delays in the introduction of newproducts and features, and may experience similar delays in the future.  If we are unable, for technological or otherreasons, to develop new products or enhancements of existing products in atimely manner in response to changing market conditions or customerrequirements, our business, operating results and financial condition will bematerially adversely affected.

 

**IntellectualProperty and Other Proprietary Rights**

 

We rely primarily on a combination ofcopyright and trademark laws, trade secrets, confidentiality procedures andcontractual provisions to protect our proprietary technology.  For example, we license our softwarepursuant to signed license agreements and, to a lesser extent, “shrink-wrap”licenses displayed in evaluation downloads and in software installation screens,which impose certain restrictions on the licensee’s ability to utilize oursoftware.  In addition, we take steps toavoid disclosure of our trade secrets, such as requiring persons with access toour proprietary information to execute non-disclosure agreements with us, andwe 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.

 

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**Competition**

 

For our VDS product, we compete withcompanies offering object and relational database management systems, many ofwhom are large and well-established corporations with broader product lines.For our Versant enJin product, our competitors consist of both relationaldatabase management companies, many of whom have or are expected to incorporatein their systems object-oriented interfaces and other functionality moredirectly competitive with our technologies, as well as companies who alreadyhave substantial experience in object-oriented software development and providecomponents similar to those included in Versant enJin. Thus, in order for ourproducts to be well accepted in the market, it is important for one or more ofour technical partnerships with application server vendors such as IBM and BEAto become deeper and more extensive.

 

Many of our competitors, especially Oracleand Computer 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. We may not be able to compete successfully against current or futurecompetitors, and competitive pressures could have a material adverse effect onour business, pricing, operating results and financial condition.

 

For a more detailed discussion of thecompetition we face in our business, see Item 7. — “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Risk Factors—RisksRelated to Our Industry—We face competition for both our VDS and Versant enJinproducts.”

 

**Employees**

 

As of October 31, 2003, we and oursubsidiaries had a total of 116 employees, of whom 63 were based in the UnitedStates, 18 in Europe, and 35 in India. ** **Ofthe total, 51 employees were engaged in engineering and technical services, 26were engaged in sales and marketing, 24 were engaged in the servicesorganization and 15 were engaged in general administration and finance. To ourknowledge, none of our employees is represented by a labor union with respectto employment with Versant.  We haveexperienced no organized work stoppage to date and believe that ourrelationship with our employees is good.

 

Our future performance depends in significantpart upon the continued service of our key technical, sales and seniormanagement personnel.  The loss of theservices of one or more of our key employees could have a material adverseeffect on our business, operating results and financial condition.

 

**Item 2. Properties.**

 

Our principal administrative, sales,marketing and research and development operations are located in Fremont,California, in an approximately 54,000 square foot building we occupy under alease expiring in May 2007 and we also have a sales office in Plano,Texas. Our international subsidiaries also lease space, generally undermulti-year operating lease agreements, in Pune, India, Munich, Germany andHampshire, England. We believe that our current facilities will be adequate forour requirements for the next several years.

 

**Item 3. Legal Proceedings**

 

We may fromtime to time be subject to various legal proceedings in the ordinary course ofbusiness.  Currently we are not subjectto any legal proceedings required to be disclosed under this Item 3.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

 

No matters were submitted to a vote ofsecurity holders during our fourth fiscal quarter of our fiscal year endedOctober 31, 2003.

 

**Item 4A. ExecutiveOfficers of the Registrant.**

 

Set forth below is information regarding our executive officers as ofJanuary 14, 2004:

 
| **Name of  Executive Officer** |   | **Age** |   | **Position with the Company**                                                      |
|--------------------------------|--------|---------|--------|------------------------------------------------------------------------------------|
|                           |   |    |   |                                                                               |
| Nick Ordon                     |   | 56      |   | President and Chief Executive Officer                                              |
|                           |   |    |   |                                                                               |
| Lee McGrath                    |   | 42      |   | Vice President, Finance and Administration,  Chief Financial Officer and Secretary |
|                           |   |    |   |                                                                               |
| Ajay Jain                      |   | 36      |   | President, Real-Time Solutions                                                     |

 

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**NickOrdon**has served as President, Chief Executive Officerand a director of the Company since he joined Versant in January 1998.From July 1996 to December 1997, Mr. Ordon was Vice Presidentand General Manager of Messaging at Lotus Development Corporation, a softwaredevelopment company and wholly-owned subsidiary of International BusinessMachines Corporation. From August 1994 to July 1996, he was VicePresident and General Manager of the Commercial Business Unit of LockheedMartin Corporation, an aerospace products company. From January 1993 toAugust 1994, Mr. Ordon served as General Manager, NetWare Operationswith Hewlett-Packard Company. Prior to entering industry, Mr. Ordon was a pilotin the United States Air Force. Mr. Ordon received both a Bachelor and Masters of Science degree inAerospace Engineering from the University of Colorado and a Masters of BusinessAdministration degree in Finance and Operations from Syracuse University.

 

**LeeMcGrath**has served as Versant’s Vice President,Finance and Administration, Chief Financial Officer and Secretary since joiningVersant in July 2000. From June 1999 to July 2000, he served asDirector of Financial Planning and Analysis, Flat Panel Systems, for PhilipsComponents, a division of Philips Electronics. From June 1997 toMay 1999, Mr. McGrath served as Controller for Digital Link Corporation,a networking equipment company. From December 1982 to June 1997, hewas with Measurex, a manufacturer of electronic control systems, where heserved in a variety of financial management and controller positions, in boththe company’s U.S. and overseas offices. Mr. McGrath is a CharteredCertified Accountant and received a Masters of Business Administration degreefrom Pepperdine University.

 

**AjayJain**has served as Versant’s President, Real TimeSolutions, a newly created business unit since November 2002. BetweenDecember 2000 and November 2002, Mr. Jain was President andChief Executive Officer of Mokume Software, Inc., a developer of planning andprocess management software for the manufacturing industry, which he co-foundedand which was acquired by Versant in November 2002. BetweenAugust 1999 and November 2000, Mr. Jain was President and ChiefExecutive Officer of Qdecor Software, a 3D software company for home decorproducts, which was acquired by Design Labs in 2000. Between August 1997and August 1999 Mr. Jain was Director, Worldwide InformationTechnology & Applications at Clarify Corporation, a public company,and developer of customer relationship management software which was acquiredby Nortel Networks in 1999. From 1995 to 1997, Mr. Jain served asSr. Manager of Database Architecture Group at Netscape Communications.Prior to 1995, Mr. Jain worked in several engineering roles for over6 years at Quantum Corporation and Cadence Design Systems. Mr. Jainholds a Masters degree in Business Administration from Santa Clara University,a Masters of Science degree in Computer and Information Science from ClarksonUniversity and a Bachelors of Science degree in Mathematics and Economics fromDelhi University, India.

 

There is no family relationship between anyof the foregoing executive officers or between any of such executive officersand any of the members of our Board of Directors. Our executive officers serveat the discretion of the Board.

 

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**PART II**

 

**Item 5.  Market for Registrant’s Common Equity andRelated Stockholder Matters.**

 

***Price Range ofCommon Stock***

 

Our common stock is quoted on the NasdaqSmallCap Market under the symbol “VSNT.” Our common stock commenced trading on the Nasdaq National Market onJuly 18, 1996.  From July 19,1999 until March 7, 2000 our common stock was traded on the NasdaqSmallCap Market.  From March 8,2000 to September 30, 2002, our common stock was traded on the NasdaqNational Market.  Since October 1,2002 our 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, 2002due to the fact that it then seemed unlikely that, in the near term, we wouldcontinue to be able to satisfy the listing criteria of the Nasdaq NationalMarket System.  The following tablelists the high and low intra-day prices of our common stock reported on theNasdaq Stock Market for the periods indicated during the last two fiscalyears.  On January 6, 2004 theclosing price of our common stock was $1.72 on the Nasdaq Stock Market.

 
|                                 |   | **High** |   | **Low** |   |
|--------------------------------------|--------|----------|--------|---------|--------|
|                                 |   |     |   |    |   |
| **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    |   |
|                                 |   |     |   |    |   |
| **Year Ended October 31, 2003** |   |     |   |    |   |
|                                 |   |     |   |    |   |
| First  Quarter                       |   | 1.29     |   | 0.41    |   |
| Second  Quarter                      |   | 1.10     |   | 0.62    |   |
| Third  Quarter                       |   | 0.96     |   | 0.48    |   |
| Fourth  Quarter                      |   | 2.68     |   | 0.52    |   |

 

***Shareholders***

 

There were approximately 130 holders ofrecord of our common stock as of December 11, 2003.  We believe that a significant number ofbeneficial owners of our common stock hold their shares in street name.  Based on information available to us, webelieve we have at least 400 beneficial shareholders of our common stock.

 

***Dividend Policy***

 

We have neither declared nor paid cashdividends on our common stock in the past. We intend to retain future earnings, if any, to fund development andgrowth of our business and, therefore, do not anticipate that we will declareor pay cash dividends on our common stock in the foreseeable future.  The Company’s current bank credit lineprohibits the payment of dividends without the Bank’s consent.

 

Information required by this Item regardingour equity compensation plans appears in, and is incorporated by reference fromPart III, Item 12 of this Report, under the heading “Securities Authorized forIssuance Under Equity Compensation Plans.”

 

***Recent Sales ofUnregistered Securities***

 

On November 19, 2002, we issued2,424,000 shares of our common stock to the former stockholders of MokumeSoftware, Inc., a privately held Delaware corporation.  These shares wereissued in consideration of our acquisition of all the outstanding stock ofMokume in a merger transaction, which resulted in Mokume becoming our whollyowned subsidiary.  Based on the market price of our common stock on thedate of the merger, the aggregate value of the Mokume shares received wasapproximately $1.3 million.  We issued these shares without registrationunder the Securities Act of 1933, or the Securities Act, in reliance on theexemptions provided by Section 4(2) of the Securities Act and Rule 506 ofRegulation D promulgated under the Securities Act.  In relying upon theforegoing exemptions,  we took into account the limited number of Mokumeshareholders (eleven in  total), their relationship to each other, thelimitation of our offering to these shareholders, the information regardingMokume, Versant and the merger transaction furnished to the Mokumeshareholders,  the 

 

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representation of Mokume by  legal counsel in connection with thetransaction and representations and  warranties made by the Mokumeshareholders to us in connection with the transaction.  No underwriterswere involved in this transaction.

 

In November of 2003, we issued 12,500shares of our common stock to Seven Hills Partners LLC in consideration ofprofessional financial advisory services without registration under the SecuritiesAct in reliance on the exemption provided by Section 4(2) of theSecurities Act.  In relying upon theforegoing exemption, we took into account the fact that there was only a singlepurchaser, the limitation of the offering to this purchaser, the financialexpertise and sophistication of the purchaser and its past knowledge of andbusiness relationship to Versant and representations and warrantiess made bySeven Hills Partners LLC to us in connection with this purchase.  No underwriters were involved in thistransaction.

 

***Issuer Purchases ofEquity Securities***

 
| **Period**                                      |   | **(a)  Total Number of  Shares (or Units)  Purchased** |   | **(b)  Average Price Paid  per Share (or Unit)** |   | **(c)  Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** |   | **(d)  Maximum Number  (or Approximate  Dollar Value) of  Shares (or Units)  that May Yet be  Purchased Under the  Plans or Programs** |   |
|-------------------------------------------------|--------|--------------------------------------------------------|--------|--------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|
| September 26  – October 26, 2003 |   | 363,600                                                | *(1)*  | Not  Applicable                                  | *(1)*  | None                                                                                                     |   | 1,454,000                                                                                                                                   | *(2)*  |
| Total:                                          |   | 363,600                                                | *(1)*  | —                                           |   | —                                                                                                   |   | 1,454,000                                                                                                                                   | *(2)*  |

 

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*(1)**      *Representscommon shares cancelled pursuant to an Amendment Agreement dated as ofSeptember 26, 2003 with the former stockholders of Mokume Software, Inc.,under which the parties agreed that such shares (which were potentially subjectto forfeiture under the Agreement and Plan of Merger dated November 19,2002 under which the Company acquired Mokume) would be cancelled andforfeited.  No cash or other propertywas paid for the cancellation and forfeiture of such shares, other thanagreements among the parties amending certain terms of the Agreement and Planof Merger.

 

*(2)*       Represents shares potentially subject toforfeiture to satisfy claims for indemnification under the Agreement and Planof Merger dated November 19, 2002, as amended, pursuant to which weacquired Mokume.

 

**Item 6.  Selected Financial Data**

 

The following selected consolidated financialdata has been derived from our audited consolidated financial statements.  The information set forth below is notnecessarily indicative of results of our future operations, and should be readin conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the consolidated financial statementsand notes in this Form 10-K in order to fully understand factors that mayaffect the comparability of the information presented below and factors thatmight cause the following selected financial data not to be indicative of ourfuture financial condition and results of operation.  In particular, it should be noted that because we changed ourfiscal year end from December 31 to October 31 in 2001, ourtransition period in 2001 was only a 10-month period, which impacts thecomparability of the following financial data

 
|                                            |   | **Year  Ended  October 31,**         |   | **Year  Ended  October 31,** |   | **Ten  Months  Ended  October 31,** |   | **Years Ended December 31** |   |
|-------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------|--------|------------------------------------------|--------|----------------------------------|--------|
|                                            |   | **2003**                                  |   | **2002**                          |   | **2001**                                 |   | **2000**                         |   | **1999** |   |
|                                            |   | **(in thousands, except per share data)** |   |
| **Consolidated Statements of Operations Data:** |   |                                      |   |                              |   |                                     |   |                             |   |   |   |
| Total  revenue                                  |   | $                                         | 22,059 |                              | $      | 19,956                                   |   | $                                | 23,909 |   | $ | 28,445 |   | $ | 25,868 |   |
| Income  (loss) from operations                  |   | (2,712                                    | )      | (3,609                            | )      | (7,012                                   | )      | 2,152                            |   | (409 | ) |
| Net income  (loss)                              |   | (2,389                                    | )      | (3,390                            | )      | (7,158                                   | )      | 1,856                            |   | (1,736 | ) |
| Net income  (loss) per share:                   |   |                                      |   |                              |   |                                     |   |                             |   |   |   |
| Basic                                           |   | $                                         | (0.17  | )                                 | $      | (0.28                                    | )      | $                                | (0.59  | ) | $ | 0.16 |   | $ | (0.17 | ) |
| Diluted                                         |   | $                                         | (0.17  | )                                 | $      | (0.28                                    | )      | $                                | (0.59  | ) | $ | 0.12 |   | $ | (0.17 | ) |

 

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|                                 |   | **Year  Ended  October 31,** |       | **Year  Ended  October 31** |       | **Ten  Months  Ended  October 31,** |       | **Years Ended December 31,** |       |
|--------------------------------------|--------|-----------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|-----------------------------------|------------|
|                                 |   | **2003**                          |       | **2002**                         |       | **2001**                                 |       | **2000**                          |       | **1999** |   |
|                                 |   | **(in thousands)**                |       |
| **Consolidated Balance Sheet Data:** |   |                              | ** ** |                             | ** ** |                                     | ** ** |                              | ** ** |   | ** ** |
| Total assets                         |   | $                                 | 11,069     |                             | $          | 11,921                                   |       | $                                 | 15,370     |   | $ | 22,502 |   | $ | 19,241 |   |
| Working  capital                     |   | 602                               |       | 2,326                            |       | 3,664                                    |       | 7,863                             |       | 1,584 |   |
| Long-term  debt                      |   | —                            |       | —                           |       | 3                                        |       | 40                                |       | 127 |   |
|                                      |        |                                   |            |                                  |            |                                          |            |                                   |            |  |  |  |  |  |  |  |

 

**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*As indicated in the paragraph above Item 1 in this report, this Form10-K (including this Item 7) contains certain forward-looking statements withinthe meaning of the Securities Exchange Act and the Securities Act.  In many cases you may identify theseforward-looking statements by words such as “will,” “should,” “may,” “might,”“believes,” “anticipates,” “expects,” “intends,” “estimates” and similarexpressions. These forward-looking statements include, among other things,projections of our future financial performance and trends anticipated for ourbusiness.  We caution investors thatforward-looking statements are only predictions or estimates based upon ourcurrent expectations about future events. The forward-looking statements are not guarantees of future performanceand are subject to significant risks and uncertainties that are difficult topredict.  Our actual results andperformance may differ materially from the results and performance anticipatedby any forward-looking statements due to these risks and uncertainties, some ofwhich are discussed below in this Item 7 under the heading  “Risk Factors.” Readers are urged tocarefully review and consider the various disclosures made by us in this reportand in our other reports filed with the Securities and Exchange Commission thatattempt to advise interested parties of the risks and factors that may affectour business.*

 

**Overview**

 

We are a California corporation and wereincorporated in August 1988.  Our principal product is the VersantDeveloper Suite, or VDS, a sixth generation object database managementsystem.  Our other products includeVersant enJin, a database management product suite that acceleratestransactions for application servers, Versant Real-time Framework, or VRTF, acomprehensive framework for delivering real-time solutions and Versant JDO, adata access tool that enables enterprise applications to efficiently accessdata from a versant object database.  Wecommenced commercial shipment of VDS in 1991 and commercially released VersantenJin in 2000.  We license VDS, Versant enJin and peripheral products, andsell associated maintenance, training and consulting services to end-usersthrough our direct sales force and through value-added resellers, systemsintegrators and distributors.  Following our acquisition of MokumeSoftware in November of 2002, we commenced our real-time solutionsbusiness and in January 2003 announced our VRTF real-time solutionsproduct.  We introduced Versant JDO inthe fourth quarter of 2003.  In addition to these products, we also offerother internally developed peripheral software products and resell relatedsoftware developed by third parties. We also provide maintenance and supportservices related to our products as well as consulting and trainingservices.  These services are animportant aspect of our business, and in the fiscal year ended October 31,2003, a majority of our revenues were derived from these services. To date,substantially all of our revenue has been derived from the following datamanagement products and services:

 

•                  salesof licenses for VDS and, to a lesser extent, Versant enJin, VRTF and VersantJDO;

 

•                  maintenanceand support services related to VDS, Versant enJin, and VRTF;

 

•                  consultingservices (Versant consulting practice and dedicated IBM WebSphere consultingpractice) and training services;

 

•                  nonrecurringengineering fees received in connection with providing services associated withVDS and Versant enJin;

 

•                  salesof peripheral products for VDS and Versant enJin;

 

•                  theresale of licenses, maintenance, training and consulting for third-partyproducts that complement VDS and Versant enJin; and

 

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•                  reimbursementsreceived for out-of-pocket expenses incurred for revenue in the incomestatement.

 

In fiscal 2003 we continued to focus ourefforts on: (i) sales and product development activities designed to obtainrevenue growth from, and enhance our data management products, VDS and VersantenJin; (ii) further work to pursue and develop our real-time solutions businessinitiative and related products, such as VRTF; and (iii) obtaining growth inour consulting service programs.

 

We expect that our principal sources ofrevenue for the foreseeable future will be licenses of VDS, Versant enJin,related products and VRTF, as well as maintenance, support, training andconsulting services.  To a lesser degreewe also anticipate deriving revenue from new products we may develop in ourreal-time business and the resale of third-party products.  While it willcontinue to be important for Versant to derive revenue from customers it hashistorically served in the telecommunications, financial services, technologyand defense industries, we believe that our efforts in the real-time marketand, to a lesser degree, in the e-business market, will be important elementsof our future performance.  Success in the market for real-time productswill depend on both the successful growth and emergence of this market and itscontinued need for highly scalable, high performance and reliable object-basedtechnologies such as ours.

 

If our proposed merger with Poet Holdings isapproved by our shareholders and Poet’s stockholders and is consummated, wecurrently expect that our data management software business will marketproducts to new and additional market segments now addressed by Poet that we donot currently pursue and that our business would focus even moreso oninternational, primarily European, sales.

 

**CriticalAccounting Policies**

 

The preparation of our 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 basethese estimates and judgments on information reasonably available to us, suchas our historical experience and trends and industry, economic and seasonalfluctuations, and on our own internal projections that we derive from thatinformation.  Although we believe ourestimates are reasonable under the circumstances, there can be no assurancesthat our estimates will be accurate given that the application of theseaccounting policies necessarily involves the exercise of subjective judgmentand the making of assumptions regarding future uncertainties.  We consider“critical” those accounting policies that require our most difficult,subjective, or complex judgments, and that are the most important to theportrayal of our financial condition and results of operations.  Thesecritical accounting policies relate to revenue recognition, goodwill andacquired intangible assets, impairment of long-lived assets, the determinationof our reserve for doubtful accounts and stock-based compensation.

 

***Revenue Recognition***

 

We recognize 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 ofrevenue earned under software license agreements, maintenance supportagreements and agreements for consulting and training activities.

 

We use 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, we defer revenue based onvendor-specific objective evidence, or VSOE, of the fair value of the undeliveredelement, as determined by the price charged when the element is soldseparately. If VSOE of fair value does not exist for all undelivered elements,we defer all revenue until sufficient evidence exists or all elements have beendelivered. We defer revenue from license arrangements that require significantmodification of the software and/or non-recurring engineering agreementsrequiring future obligations not yet performed and record it as revenue usingcontract accounting.

 

Revenue from software license arrangements,including prepayment revenue, is recognized when all of the following criteriaare met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred; (3) the fee is fixed and determinable; and (4) collection isprobable.  If an acceptance period or other contingency exists, revenue isrecognized upon satisfaction of the contingency, customer acceptance orexpiration of the acceptance period, as applicable.

 

We license our data management products toend-users, value-added resellers and distributors through two types ofperpetual licenses—development licenses and deployment licenses. Developmentlicenses are typically sold on a per seat

 

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basis and authorize a customer to develop an application program thatuses VDS or Versant enJin.  Before thatcustomer may deploy an application that it has developed under our developmentlicense, it must purchase deployment licenses based on the number of computersconnected to the server that will run the application using our databasemanagement system.  For certain applications, we offer deployment licensespriced 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.  Customers may elect to simultaneouslypurchase development and deployment licenses for an entire project. Thesedevelopment and deployment licenses may also provide for prepayment of anonrefundable amount for future deployment*.*

 

Versant does not currently license our VRTFproduct directly to end-users.  To date,it has been marketed only as a private-labeled product sold through physicalexecution systems vendors to whom Versant will provide integration, trainingand other consulting services.

 

Resellers, including value-added resellersand distributors, purchase development licenses from us on a per seat basis, onterms similar to those of development licenses sold directly toend-users.  Resellers are authorized to sublicense deployment copies ofVDS, Versant enJin and VRTF that are either bundled or embedded in theresellers’ applications and sold directly to end-users.  Resellers arerequired to report their distribution of our software and are charged a royaltythat is based either on the number of copies of application softwaredistributed or computed as a percentage of the selling price charged by thereseller to its end-user customers. Revenue from royalties is recognized whenreported by the reseller, assuming collection is probable.

 

Revenue from our resale of third-partyproducts is recorded at total contract value with the corresponding costincluded in cost of sales when we act as a principal in these transactions andwe assume the risks and rewards of ownership, including the risk of loss forcollection, delivery or returns. When we do not assume the risks and rewards ofownership, revenue from our resale of third-party products or services isrecorded at contract value net of the cost of sales.

 

Probability of collection is assessed usingthe following customer information: credit service reports, bank and tradereferences, public filings, and/or current financial statements.  Priorpayment experience is reviewed on all existing customers.  Payment termsin excess 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 payment terms are generally granted only to customers with a provenability to pay at the time the order is received, and with prior approval ofour senior management.

 

We defer revenue from maintenance and supportarrangements and recognize it ratably over the term of the arrangement, whichis typically twelve months.  Training and consulting revenue is recognizedwhen a purchase order is received, the services have been performed andcollection is deemed probable.  Consulting services are billed on anhourly, daily or monthly rate.  Training classes are billed based on groupor individual attendance.

 

***Goodwill andAcquired Intangible Assets***

 

We account for purchases of acquiredcompanies in accordance with Statement of Financial Accounting Standards No.141 *BusinessCombinations* (SFAS 141) and account for the related acquiredintangible assets in accordance with SFAS No. 142 *Goodwill and Other Intangible Assets*(SFAS 142).  In accordance with SFAS 141, we allocate the cost of theacquired companies to the identifiable tangible and intangible assets andliabilities acquired, with the remaining amount being classified asgoodwill.  Certain intangible assets, such as “acquired technology,” areamortized to expense over time, while in-process research and development costs(“IPR&D”), if any, are charged to operations at the acquisition date.

 

Mokume Software, which we acquired in November of2002, did not have significant tangible assets at the date of acquisition and,as a result, a significant portion of the purchase price has been allocated tointangible assets and goodwill.  Our future operating performance will beimpacted by the future amortization of intangible assets, potential chargesrelated to IPR&D for future acquisitions, and potential impairment chargesrelated to goodwill.  Accordingly, the allocation of the purchase price tointangible assets and goodwill has a significant impact on our future operatingresults and requires our management to make significant estimates andassumptions, including estimates of future cash flows expected to be generatedby the acquired assets and the appropriate discount rate for these cash flows. Should different conditions prevail than we initially assumed, materialwrite-downs of intangible assets and/or goodwill could occur.

 

17

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As required by SFAS 142, we ceased amortizinggoodwill effective November 1, 2002.  Prior to November 1, 2002,Versant amortized goodwill over five years using the straight-linemethod.  Identifiable intangibles (acquired technology) are currentlyamortized over five years using the straight-line method.  As describedbelow, in lieu of amortizing goodwill, Versant tests goodwill for impairmentperiodically and records any necessary impairment in accordance with SFAS 142.

 

***Impairment ofLong-Lived Assets***

 

We test goodwill for impairment in accordancewith SFAS 142, which requires that goodwill be tested for impairment at the“reporting unit level” (“Reporting Unit”) at least annually and more frequentlyupon the occurrence of certain events, as provided in SFAS 142.  Goodwillis tested for impairment annually in a two-step process.  First, we mustdetermine if the carrying amount of a Reporting Unit exceeds its “fair value,”based on quoted market prices of our common stock, which would indicate thatgoodwill might be impaired.  If we determine that goodwill may be impaired,we compare the “implied fair value” of the goodwill, as defined by SFAS 142, toour carrying amount to determine the impairment loss, if any.

 

We evaluate long-lived assets, includingintangible assets other than goodwill, for impairment in accordance with theprovisions of SFAS No. 144 *Accounting for the Impairment or Disposal ofLong-Lived Assets* (SFAS 144).  SFAS 144 requires thatlong-lived assets and intangible assets other than goodwill be evaluated forimpairment whenever events or changes in circumstances indicate that thecarrying value of an asset may not be recoverable based on expectedundiscounted cash flows attributable to that asset.  Should eventsindicate that any of our assets are impaired, the amount of such impairmentwill be measured as the difference between the carrying value and the fairvalue of the impaired asset and recorded in earnings during the period of suchimpairment.

 

***Reserve for DoubtfulAccounts***

 

We initially record our provision fordoubtful accounts based on historical experience and then adjust this provisionat the end of each reporting period based on a detailed assessment of ouraccounts receivable and allowance for doubtful accounts.  In estimatingthe provision for doubtful accounts, we consider, among other factors: (i) theaging of the accounts receivable; (ii) trends within and ratios involving theage of the accounts receivable; (iii) the customer mix in each of the agingcategories and the nature of the receivable (i.e. license, consulting,maintenance, etc.); (iv) Our historical provision for doubtful accounts; (v)the credit-worthiness of each customer; (vi) the economic conditions of thecustomer’s industry; and (vii) general economic conditions.

 

***Stock-BasedCompensation***

 

We have elected to continue to account for employee stock-basedcompensation plans using the intrinsic value method, as prescribed by APB No. 25 *Accountingfor Stock Issued to Employees* and interpretations thereof(collectively “APB 25”) rather than the fair value method allowed by SFAS No. 123 *Accounting for Stock-Based Compensation*(SFAS 123) as amended by SFAS 148.  Accordingly, deferred compensation isonly recorded if the current price of the underlying stock exceeds the exerciseprice on the date of grant.  We record and measure deferred compensationfor stock options granted to non-employees at their fair value.  Deferredcompensation is expensed on an accelerated basis over the vesting period of therelated stock option, which is generally up to four years.

 

**Results of Operations**

 

In 2001, wefiled a report on Form 8-K reporting the decision by our Board of Directors tochange 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 October 31, 2003,the year ended October 31, 2002 and the ten months ended October 31,2001 because it was impracticable and not cost-justified to furnish complete financial statements for thecomparable periods ended October 31, 2001.  We do not believe that seasonal or other factors affect thecomparability of information or trends in those financial statements.  However, when reviewing this Item 7, readersshould keep in mind that, because our transition period ended October 31,2001 was a ten month (and not a twelve month) period, it is more difficult todirectly compare our results for that transition period with our twelve-monthreported periods ended October 31, 2003 and October 31, 2002.

 

As usedin this Management’s Discussion and Analysis Section, references to “2003” meanthe twelve month period ended October 31, 2003, references to”2002” meansthe twelve month period ended October 31, 2002 and references to “2001”,“ten month 2001 period” or “2001 reported period” each mean the ten monthperiod ended October 31, 2001.

 

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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, 2003** |       | **Twelve  Months  Ended  Oct 31, 2002** |       | **Ten  Months  Ended  Oct 31, 2001** |       |
|--------------------------------|--------|-----------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|
|                           |   |                                    | ** ** |                                    | ** ** |                                 | ** ** |
| Revenue:                       |   |                                    |       |                                    |       |                                 |       |
| License                        |   | 41                                      | %          | 51                                      | %          | 31                                   | %          |
| Maintenance                    |   | 28                                      | %          | 26                                      | %          | 22                                   | %          |
| Professional Services          |   | 31                                      | %          | 23                                      | %          | 47                                   | %          |
| Total revenue                  |   | 100                                     | %          | 100                                     | %          | 100                                  | %          |
| Cost of revenue:               |   |                                    |       |                                    |       |                                 |       |
| License                        |   | 4                                       | %          | 5                                       | %          | 3                                    | %          |
| Maintenance                    |   | 6                                       | %          | 6                                       | %          | 6                                    | %          |
| Professional Services          |   | 27                                      | %          | 21                                      | %          | 43                                   | %          |
| Amortization of Intangibles    |   | 0                                       | %          | 0                                       | %          | 0                                    | %          |
| Total cost of revenue          |   | 37                                      | %          | 32                                      | %          | 52                                   | %          |
|                           |   |                                    |       |                                    |       |                                 |       |
| Gross profit margin            |   | 63                                      | %          | 68                                      | %          | 48                                   | %          |
|                           |   |                                    |       |                                    |       |                                 |       |
| Operating expenses:            |   |                                    |       |                                    |       |                                 |       |
| Marketing and sales            |   | 35                                      | %          | 39                                      | %          | 35                                   | %          |
| Research and development       |   | 20                                      | %          | 29                                      | %          | 23                                   | %          |
| General and administrative     |   | 15                                      | %          | 17                                      | %          | 12                                   | %          |
| Stock based  compensation |   | 5                                       | %          | 0                                       | %          | 0                                    | %          |
| Amortization of goodwill       |   | 0                                       | %          | 1                                       | %          | 4                                    | %          |
| Restructuring                  |   | 0                                       | %          | 0                                       | %          | 3                                    | %          |
| Total operating expenses       |   | 75                                      | %          | 86                                      | %          | 77                                   | %          |
| Loss from operations           |   | (12                                     | )%         | (18                                     | )%         | (29                                  | )%         |
| Other income (expense), net    |   | 2                                       | %          | 1                                       | %          | 0                                    | %          |
| Loss before income taxes       |   | (10                                     | )%         | (17                                     | )%         | (29                                  | )%         |
| Provision for income taxes     |   | 1                                       | %          | 0                                       | %          | 0                                    | %          |
| Net loss                       |   | (11                                     | )%         | (17                                     | )%         | (29                                  | )%         |

 

The followingtable summarizes the results of our operations for the periods presented:

 
|                          |   | **Twelve  Months  Ended  Oct 31, 2003** |       | **Twelve  Months  Ended  Oct 31, 2002** |       | **Ten  Months  Ended  Oct 31, 2001** |       | **% change  in 10/31/03  from  10/31/02** |       | **% change  in 10/31/02  from  10/31/01** |       |
|-------------------------------|--------|-----------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
|                          |   |                                    | ** ** |                                    | ** ** |                                 | ** ** |                                      | ** ** |                                      | ** ** |
| License revenue               |   | $                                       | 9,082      |                                    | $          | 10,106                               |       | $                                         | 7,362      |                                      | (10        | )% | 37 | % |
| Maintenance revenue           |   | 6,076                                   |       | 5,300                                   |       | 5,135                                |       | 15                                        | %          | 3                                         | %          |
| Professional services revenue |   | 6,901                                   |       | 4,550                                   |       | 11,412                               |       | 52                                        | %          | (60                                       | )%         |
| Total revenue                 |   | 22,059                                  |       | 19,956                                  |       | 23,909                               |       | 11                                        | %          | (17                                       | )%         |
|                          |   |                                    |       |                                    |       |                                 |       |                                      |       |                                      |       |
| Cost of license revenue       |   | 843                                     |       | 902                                     |       | 634                                  |       | (7                                        | )%         | 42                                        | %          |
| Cost of maintenance revenue   |   | 1,312                                   |       | 1,291                                   |       | 1,191                                |       | 2                                         | %          | 8                                         | %          |
| Cost of services revenue      |   | 6,011                                   |       | 4,041                                   |       | 10,546                               |       | 49                                        | %          | (62                                       | )%         |
| Amortization of intangibles   |   | 91                                      |       | —                                  |       | —                               |       | —                                    |       | —                                    |       |
| Total cost of revenue         |   | 8,257                                   |       | 6,234                                   |       | 12,371                               |       | 32                                        | %          | (50                                       | )%         |
|                          |   |                                    |       |                                    |       |                                 |       |                                      |       |                                      |       |
| Operating expenses:           |   |                                    |       |                                    |       |                                 |       |                                      |       |                                      |       |
| Marketing and sales           |   | 7,698                                   |       | 7,854                                   |       | 8,482                                |       | (2                                        | )%         | (7                                        | )%         |
| Research and development      |   | 4,340                                   |       | 5,835                                   |       | 5,464                                |       | (26                                       | )%         | 7                                         | %          |
| General and administrative    |   | 3, 267                                  |       | 3,440                                   |       | 2,963                                |       | (5                                        | )%         | 16                                        | %          |
| Stock based compensation      |   | 1,209                                   |       | —                                  |       | 22                                   |       | 100                                       | %          | (100                                      | )%         |
| Amortization of goodwill      |   | —                                  |       | 202                                     |       | 396                                  |       | (100                                      | )%         | (49                                       | )%         |
| Write off goodwill            |   | —                                  |       | —                                  |       | 555                                  |       | —                                    |       | (100                                      | )%         |
| Restructuring costs           |   | —                                  |       | —                                  |       | 668                                  |       | —                                    |       | (100                                      | )%         |
| Total operating expense       |   | 16,514                                  |       | 17,331                                  |       | 18,550                               |       | (5                                        | )%         | (7                                        | )%         |
| Loss from operations          |   | (2,712                                  | )          | (3,609                                  | )          | (7,012                               | )          | (25                                       | )%         | (49                                       | )%         |
| Other income (expense), net   |   | 397                                     |       | 287                                     |       | (53                                  | )          | 38                                        | %          | (642                                      | )%         |
| Loss before income taxes      |   | (2,315                                  | )          | (3,322                                  | )          | (7,065                               | )          | (30                                       | )%         | (53                                       | )%         |
| Provision for income taxes    |   | 74                                      |       | 68                                      |       | 93                                   |       | 9                                         | %          | (27                                       | )%         |
| Net loss                      |   | $                                       | (2,389     | )                                       | $          | (3,390                               | )          | $                                         | (7,158     | )                                         | (30        | )% | (53 | )% |

 

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***Summary Overview***

 

Total revenuefor the year ended October 31, 2003 increased by 11% over our totalrevenue for the twelve months ended October 31, 2002.  This increase resulted from a 52% increasein our professional services revenues (primarily from our dedicated WebSphere consulting practice) and to a lesser degree froma 15% increase in our maintenance revenues, and was offset by a 10% decrease inour license revenues in 2003, when compared to 2002.  Total revenue for the year ended October 31, 2002 decreasedby 17% from our total revenue for the ten months ended October 31,2001.  Our total services revenue for2002 was down 40% from total services revenue for the 2001 reporting periodwhile license revenues increased 37% over 2001.

 

Total operatingexpenses in the year ended October 31, 2003 decreased 5% to $16.5 millionfrom $17.3 million in 2002.  Our totaloperating expenses of $17.3 million in 2002 represented a decrease of 7% fromour operating expenses of  $18.6 millionin 2001.  These decreases in both fiscal2003 and 2002 were the result of lower costs associated with reduced headcountand cost cutting efforts that we implemented in 2001 and continued in 2002 and2003. Our operating expenses for 2003 included a $1.2 million stock basedcompensation expense.  This chargeresulted from the accelerated vesting of employee owned shares issued inconnection with our acquisition of Mokume (please refer to thesection titled ‘Stock Based Compensation’ below) and to a lesser extentfrom stock options granted to non-employees.  Excluding this stock based compensationexpense in 2003, our operating expenses in2003 would have decreased 12% over 2002 operating expenses, which did notinclude any stock based compensation charge.

 

Net loss for2003 improved 30% over 2002.  Net lossfor 2002 was a 53% improvement over the reporting period in 2001.

 

***Revenue***

 

Totalrevenue increased 11% to $22.1 million in the twelve-month period endedOctober 31, 2003 from $20.0 million in the twelve-month period endedOctober 31, 2002.  Thisincrease resulted primarily from a 52% increase in our professional servicesconsulting revenue, which depends significantly on revenues from our WebSphereconsulting practice, and to a lesser extent from increased maintenancerevenues, which increased by 15% year over year.  License revenue for 2003 was down 10% from 2002.

 

The technology sector was the biggestcontributor to the increase in 2003, representing 34% of total revenues in 2003compared with 18% in 2002, largely attributable to the growth in our WebSphereconsulting practice revenues. Telecom customers, represented 23% of totalrevenues in 2003 and continue to be a significant vertical market for Versantalthough this sector was down compared with 2002 and with historical norms for Versant,reflecting the ongoing economic challenges in that industry. Defense sectorrevenue was consistent with 2002 in percentage terms, representing 14% of totalrevenue while financial services revenue increased to 9% of total revenue in2003 compared with 6% in 2002.

 

In thetwelve-month period ended October 31, 2002 total revenue decreased 17% to$20.0 million from $23.9 million in the ten-month period ended October 31, 2001. Revenue fromtelecom and financial services customers constituted 36% of our total revenuein 2002 compared with 57% in the ten-month period ended October 31, 2001.Telecom customers were particularly important, comprising 30% of our totalrevenue in 2002 and 53% of our total revenue in the ten months ended October,31,2001. Revenues from the defense sector increased in 2002 and somewhatmitigated declines in the commercial sector, accounting for 14% of our totalrevenue in 2002

 

International revenues were $5.4 million or25% of our total revenue in 2003,  $6.4million or 32% of our total revenue in 2002 and $6.5 million or 28% of ourtotal revenue in 2001. The decrease over all reported periods was the result ofthe

 

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economic downturn, especially as it applied to the telecommunicationsindustry, which has had a more marked effect on international sales than ondomestic sales, particularly in Europe. We intend to maintain our sales and marketing activities outside theUnited States, which include supporting our subsidiaries, distributors andresellers in Europe, Japan and other Asia/Pacific countries.  This will require significant managementattention and financial resources, and may increase costs and impact marginsunless and until corresponding revenue is achieved.

 

Our international sales are made at theforeign currency equivalent of a U. S. dollar based price.  An increase or decrease in the value of theUnited States dollar relative to foreign currencies could make our productsmore or less expensive respectively and, therefore, impact our competitivenessin foreign markets.  To the extent thatwe increase our reliance on international sales, our total revenue may be affected to a greaterextent by seasonal fluctuations resulting from lower sales levels thattypically occur during the summer months in Europe and other parts of theworld.

 

We continue to experience significantquarterly fluctuations in total revenue and believe this trend will continue in2004 and is consistent with our industry.

 

License Revenue

 

License revenue decreased 10% to $9.1 millionin 2003 from $10.1 million in 2002 primarily due to lower transaction volume(2002’s transaction volume was the highest in four years albeit at loweraverage deal values).  The reducedtransaction volume in 2003 was partially offset by higher average dealvalues.  Lengthy sales cycles andcustomers’ preference for licensing our software on an “as needed” basis versusthe historical practice of prepaying license fees in advance of usage continueto be factors affecting our license revenues, as does the macroeconomicenvironment, especially as it pertains to the telecom industry. Deploymentlicense revenues, which we consider to be an important indicator of therelevance of our technology in the marketplace, accounted for 83% of totallicense revenues in 2003 compared with 75% of total license revenues in 2002and 62% for the reported period of 2001. We are encouraged that deploymentlicense revenue in 2003 and 2002 returned to a level more consistent withhistorical norms.

 

License revenue increased 37% to $10.1million in 2002 from $7.4 million in the ten month 2001 period, primarily dueto increased deployment license revenues (specifically in the defense sector)and secondarily due to the resale of third party software, which represented 9%of our 2002 license revenues.

 

As a percentageof total revenue, license revenues were 41% in 2003, 51% in 2002 and 31% in theten months ended October 31, 2001.

 

Maintenance and technical support revenue

 

Maintenance and technical support revenueincludes revenue derived from maintenance agreements that provide customersinternet and telephone access to support personnel and software upgrades,dedicated technical assistance and emergency response support options.  It also includes maintenance revenue on theresale of third party products.

 

Maintenance and technical support revenuesincreased 15% to $6.1 million in 2003 from $5.3 million in 2002, and in 2002they increased 3% from $5.1 million when compared to the ten months endedOctober 31, 2001.  These increaseswere primarily due to an increase in maintenance pricing on new license dealswhich mitigated the impact of reduced license sales and also our continuedefforts to bring the installed customer base current on their maintenance contractsfor customers that were running older versions of our software.

 

As a percentage of total revenues,maintenance and technical support revenues increased to 28% in 2003 from 26% in2002 and 22% in the ten months ended October 31, 2001.

 

Professional Services Revenue

 

Professional services revenue consists ofrevenue from consulting, training and technical support as well as billabletravel expenses incurred by our service organization.

 

Professional services revenue increased 52%to $6.9 million in 2003 from $4.6 million in 2002, mainly as a result of growthin our WebSphere consulting practice and secondarily due to the growth in ourVersant consulting practice. Professional services revenue decreased 60% to$4.6 million in 2002 from $11.4 million in the ten month 2001 period. The

 

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decrease in 2002 from 2001 was mainly the result of a significantone-time sub-contracted service engagement that commenced in December 2000and concluded in November 2001, with a corresponding decline in 2002services revenue.

 

As a percentage of total revenue,professional service revenues increased to 31% in 2003 from 23% in 2002, whichdecreased from 47% of total revenue in the ten months ended October 31,2001.

 

***Costof Revenue and Gross Profit Margins***

 

The key factors that cause variations in ourcost of revenue are primarily the mix of our product sales and secondarily, oursales volume. In general, a higher proportion of license revenue will result inlower overall total costs of revenue and thus higher gross profit margins.  Our maintenance revenues have the nextlowest associated costs, with consulting revenues attracting the highest costs.

 

Total cost of revenue increased 32% to $8.3million in 2003, up from $6.2 million in 2002. Approximately 68% of this $2.1 million year over year increase was dueto our sales mix in 2003, in which a larger proportion of our revenues werehigher cost service revenues, which increased and represented 59% of totalrevenue in 2003 compared to 49% in 2002, while our license revenues represented41% of total revenue in 2003 compared with 51% in 2002.  Approximately 32% of our increase in costsof revenue in 2003 was attributable to increased overall sales volume. Totalcost of revenue decreased 50% to $6.2 million in 2002 from $12.4 million in2001. Approximately 67% of this $6.2 million year over year decrease was againdue to our sales mix, with license revenues representing 51% of total revenuein 2002 compared with 31% in 2001, while approximately 33% of theyear-over-year decrease in cost of revenue was attributable to decreasedoverall sales volume.

 

Total cost of revenue was 37% of totalrevenue in 2003, 32% of total revenue in 2002 and 52% of total revenue in 2001.

 

Cost of license revenue

 

Cost of license revenue consists primarily ofproduct royalty obligations incurred by us when we sublicense tools provided bythird parties, and costs of user manuals, product media, production laborcosts, freight and packaging. Cost of license revenue was 4% of total revenuein 2003, 5% of total revenue in 2002 and 3% of total revenue in 2001.  Cost of license revenue was 9% of licenserevenue in 2003, 2002 and 2001.

 

Cost of license revenue decreased 7% in 2003to $843,000 compared to $902,000 in 2002. This net year over year decline of $59,000 is comprised of approximately$91,000 attributable to decreased license sales volume offset by approximately$32,000 of incremental resale costs.

 

Cost of license revenue increased 42% in 2002to $902,000 as compared to $634,000 in the ten month 2001 period. Approximately88% of this $268,000 increase was sales volume related, with the remainderattributable to the cost of reselling third party software, which commenced in2002, and these increases were offset by a reduction in royalties payable by uswith respect to our enJin product, primarily due to the fulfillment of ourobligations under our third party royalty agreement.

 

Cost of maintenance and technical supportrevenue

 

Cost of maintenance and technical supportrevenue consists principally of personnel costs associated with providing  technical support and has remainedreasonably constant at approximately 6% of our total revenue in 2003, 2002 andthe ten month period ended 2001.  Costof maintenance and technical support revenue was 22% of maintenance revenue in2003, 24% in 2002 and 23% in 2001.

 

Cost of professional services revenue

 

Cost of professional services revenueconsists principally of personnel costs (both employee and sub-contractor) associatedwith providing consulting and training. Cost of revenues from professionalservices may vary depending on whether such services are provided by Versantpersonnel or by sub-contracted third party consultants. Cost of professionalservices revenue was 27% of total revenue in 2003, 21% of total revenue in 2002and 43% of total revenue in 2001.  Costof professional services revenue was 87% of professional services revenue in2003, 89% in 2002 and 92% in 2001.

 

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Cost of professional services revenueincreased 49% to $6.0 million in 2003 from $4.0 million in 2002 almost entirelyattributable to increased consulting revenues, especially in our dedicatedWebSphere practice.

 

Cost of professional services revenuedecreased 62% to $4.0 million in 2002 from $10.5 million in 2001. Approximately97% of this $6.5 million year over year decrease was volume related, due to theconclusion in November 2001 of a significant one-time sub-contractedservice engagement that commenced in December 2000, and the remainderbeing the favorable cost impact of using a higher proportion of Versantpersonnel to provide professional services in 2002 versus 2001.

 

***Marketing and SalesExpenses***

 

Marketing and sales expenses consist primarilyof marketing and sales labor costs, sales commissions, recruiting, businessdevelopment, travel, advertising, public relations, seminars, trade shows, leadgeneration, marketing and sales literature, product management, sales offices,occupancy and depreciation expense.

 

Marketing and sales expense decreased 2% in2003 to $7.7 million from $7.9 million in 2002 as a result of lower commissionexpense corresponding with the lower license revenue, and lower marketingprogram costs in connection with our ongoing efforts to reduce expense..Marketing and sales expense decreased 7% in 2002 to $7.9 million from $8.5million in the ten month 2001 period as a result of lower marketing programcosts.

 

As a percentage of revenue, marketing andsales expense was 35% in 2003 versus 39% in 2002, primarily due to increasedrevenues and secondarily due to reduced expenses.  Marketing and sales expense was 39% of total revenue in 2002versus 35% in the ten month 2001 period primarily due to decreased revenue butmitigated by reduced expense.

 

***Research andDevelopment Expenses***

 

Research and development expenses consistprimarily of salaries, recruiting and other employee-related expenses,depreciation, and expenses associated with development tools, equipment,supplies and travel.

 

Research and development expenses decreased26% in 2003 to $4.3 million from $5.8 million for 2002, due to reducedheadcount as well as cost reduction efforts implemented during 2003.  Research and development expenses increased7% in 2002 to $5.8 million from $5.5 million for the ten month 2001 period.This increase was the result of comparing twelve months of expense in 2002 toonly ten months of expense in 2001.

 

As a percentage of revenue, research anddevelopment expense was 20% in 2003 versus 29% in 2002, primarily due toreduced expense and secondarily due to increased revenues. As a percentage ofrevenue, research and development expense was 29% in 2002 versus 23% in 2001,primarily due to decreased revenue and secondarily due to increased expense.

 

We believe that a significant level ofresearch and development expenditures is required to remain competitive andcomplete products under development. Accordingly, we anticipate that we will continue to devote substantialresources to research and development to design, produce and increase thequality, competitiveness and acceptance of our products. However, if wecontinue our research and development efforts without corresponding increasesin revenue, our results of operations would be adversely affected.  To date, all research and developmentexpenditures have been expensed as incurred.

 

***General andAdministrative Expenses***

 

General and administrative expenses consistprimarily of salaries, benefits and other employee related costs for our finance,human resources, legal and executive management functions.  In addition, general and administrativeexpenses include outside legal, audit and public reporting costs, allocatedfacilities costs and reserves for estimated bad debts.

 

General and administrative expenses decreased5% to $3.3 million in 2003 from $3.4 million in 2002 primarily due to reducedbad debt expense. General and administrative expenses increased 16% to $3.4million in 2002 from $3.0 million in the ten month 2001 period, with theincrease being principally a function of comparing twelve months of expenses in2002 with ten months in 2001.

 

As a percentage of revenue, general andadministrative expense was 15% in 2003 versus 17% in 2002 primarily due toincreased revenues and secondarily due to decreased expense.  General and administrative expense was 17%in 2002 versus 12% in the ten month 2001 period primarily due to reducedrevenues and secondarily due to increased expense.

 

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***Amortizationand Write-down of Goodwill***

 

Our acquisition of Mokume Software inNovember of 2002 resulted in our recording goodwill of $363,417.  Subsequent to the purchase we reclassifiedadditional goodwill in the amount of $53,400 and in September of 2003, werecorded additional goodwill of $290,000. As SFAS No. 142 was adopted on November 1, 2002, it requires thatexisting goodwill is no longer subject to amortization.  As of October 31, 2003, we had goodwillfor Mokume of approximately $708,000, 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 note 9to our consolidated financial statements included in Item 8 of this report.

 

Our acquisition of Versant Europe inMarch 1997 resulted in our recording goodwill of $3.3 million. Thisgoodwill was being amortized on a straight-line basis over seven years, but wechanged this estimate to a five-year period in 1998. We amortized approximately$187,000 of this amount in 2002 and $156,000 of this amount in 2001.  As of October 31, 2003, we had goodwillfor Versant Europe of approximately $219,000, no longer subject to amortizationbut instead subject to periodic evaluations for impairment.

 

Our acquisition of Soft Mountain inSeptember 1998 resulted in our recording goodwill of $1.2 million, whichwas being amortized over a five-year period. In October 31, 2001, we wrote off the remaining $555,000 net bookvalue of the goodwill related to Soft Mountain because the carrying value ofthe asset was impaired as a result of the abandonment of the product and theclosure of our office in France.

 

 As ofOctober 31, 2003, we had additional goodwill related to our Versant Indiaacquisition of $21,000, which will no longer be amortized.

 

***Stock BasedCompensation***

 

The Company recorded $337,000 of stock based 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 price 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.  In January of 2001, the Company renewedthe agreement, which includes compensation to the public relations firm forservices rendered at a monthly rate of $6,000 plus 62,500 non-qualified stockoptions under its 1996 Equity Incentive Plan. Of the 62,500 options granted,6,500 vested in full at $1.61 per share, and the remaining 56,000 optionsvested based upon meeting certain performance criteria.  The non-vested options were exercisable at aweighted average exercise price of $4.67 per share.  The vested andunvested options expired in November 2002.  In September of 2003, the company entered into a newagreement with this firm that granted 62,500 options that vested in full at$2.00 per share.  The Company recorded$22,000 to stock based compensationexpense in 2001 and $69,513 to stock basedcompensation expense in 2003, related to these options.

 

In October of 2003, the Company recorded$4,976 of stock based compensationexpense related to 6,000 options granted to a marketing consultant pursuant toa February 29, 2003 agreement.  InOctober of 2003, the Company also recorded $5,709 of stock based expenserelated to 3,000 and 250 options granted to a sales consultant pursuant toJuly 2002 and November 2002 agreement, respectively.

 

In October of 2003, the Company alsorecorded $1.1 million of stock basedcompensation expense related to the acceleration of the vesting of employeeowned shares, pursuant to an Amendment Agreement dated September 26, 2003,entered into with certain of the former stockholders of Mokume Software, Inc.(the “former Mokume stockholders”), which amended the Agreement and Plan ofReorganization dated as of November 19, 2002 pursuant to which Versantacquired Mokume (the “Mokume Merger Agreement”). Under the terms of the MokumeMerger Agreement, under certain circumstances Versant was entitled torepurchase from the former Mokume stockholders a total of 1,212,000 of theVersant shares issued to them pursuant to the Mokume Merger Agreement (the“Contingent Shares”). The accelerated vesting of Contingent Shares owned bynon-employees was recorded as additional goodwill in the amount of $290,000.The principal modifications to the Merger Agreement that were affected by theAmendment Agreement are summarized below.

 

•                  Atotal of 363,600 of the Contingent Shares were forfeited by the former Mokumestockholders and cancelled without consideration and the remaining 848,400Contingent Shares are no longer subject to forfeiture or repurchase by Versantand have been released from any repurchase restrictions that were applicable tothem.

 

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•                  Subjectto certain conditions, the 2,060,400 shares of Versant common stock issuedunder the Mokume Merger Agreement that remain outstanding after the forfeitureof 363,600 Contingent Shares are to be released from the risk of forfeiture tosatisfy claims for indemnification made by Versant under the Merger Agreementin installments over time as follows:

 

•                  606,400shares were released from potential forfeiture under indemnification claims onSeptember 26, 2003; and

 

•                  Thebalance of 1,454,000 shares are to be released in various increments at varioustimes during the one-year period beginning on November 19, 2003 and endingNovember 19, 2004, when all shares not previously forfeited would bereleased from indemnification claims.

 

***Restructuring Costs***

 

On October 31, 2001, we implemented arestructuring plan aimed at optimizing our performance in Europe.  The primary goal was to reduce operatingexpenses, while maintaining current revenue streams in Europe. As a result, wechanged our distribution model in France from that of a wholly owned subsidiaryto an independent distributor.  As aresult of this restructuring we incurred one-time costs related to employeeseverance payments, related benefit and outplacement expenses, termination of abuilding lease and accounting and legal costs associated with the closure ofthe office and the write-off of the carrying value of fixed assets. The totalcost of the restructuring was estimated at $668,000 and was recorded asrestructuring costs in operating expenses in the ten months endedOctober 31, 2001.  As ofOctober 31, 2003 all remaining obligations were paid.

 

***Other Expense, Net***

 

Other income (expense), net primarilyrepresents the foreign currency gain or loss as a result of settlingtransactions denominated in currencies other than our functional currency andthe re-measurement of non-functional currency monetary assets andliabilities.  Secondarily, it representsthe interest expense associated with our financing activities offset by incomeearned on our cash and cash equivalents. We reported net other income of$397,000 in 2003, which includes a foreign exchange gain of $343,000 inconnection with foreign currency transaction adjustments recorded in 2003,  $2,000 interest expense and $56,000 otherincome expense, net.  We reported netother income of $287,000 in 2002, which includes a $200,000 refund we receivedfrom an insurance deductible paid in prior periods and experienced lowerinterest payments on capital leases and bank loans.  We reported net other expense of $53,000 in the ten month 2001period.

 

***Provision for IncomeTaxes***

 

We account for income taxes in accordancewith Statement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes.”  We incurred netoperating losses in 2003, 2002, and 2001. We also incurred foreign withholdingtaxes of  $74,000, $68,000 and $93,000in 2003, 2002, and 2001, respectively, which are included within the income taxprovision.

 

At October 31, 2003, we had federal andstate net operating loss carryforwards of $45.5 million and $11.3 million, respectively, and tax creditcarryforwards of  $3.3 million expiringon various dates through 2023.  Due toour history of operating losses and other factors, we believe that there issufficient uncertainty regarding the realizability of these carryforwards, andtherefore a valuation allowance of approximately $20.5 million has beenrecorded against our net deferred tax assets of approximately $20.5 million.  We will continue to assess the realizabilityof the tax benefit available to us based on actual and forecasted operatingresults.

 

Due to the “change in ownership” provisionsof the Internal Revenue Code of 1986, the availability of net operating lossand tax credit carryforwards to offset federal taxable income in future periodsis subject to an annual limitation due to changes in ownership for income taxpurposes.

 

**Liquidityand Capital Resources**

 
|                                                          |   | **Year Ended  October 31,  2003** |   | **% Change** |   | **Year Ended  October 31,  2002** |   | **% Change** |   | **Ten Months  Ended  October 31,  2001** |   |
|---------------------------------------------------------------|--------|----------------------------------------|--------|--------------|--------|----------------------------------------|--------|--------------|--------|-----------------------------------------------|--------|
| Net cash  provided by (used in) operating activities          |   | (1,091,000                             | )      | (314         | )%     | 509,000                                |   | 57           | %      | 325,000                                       |   |
| Net cash  used in investing activities                        |   | (527,000                               | )      | (2495        | )%     | 22,000                                 |   | (113         | )%     | (171,000                                      | )      |
| Net cash  provided by (used in) financing activities          |   | 673,000                                |   | 340          | %      | (281,000                               | )      | (17          | )%     | (338,000                                      | )      |
| Period-end  cash, cash equivalents and short-term investments |   | 3,311,000                              |   | (25          | )%     | 4,427,000                              |   | 8            | %      | 4,101,000                                     |   |
| Period-end  working capital                                   |   | 602,000                                |   | (74          | )%     | 2,326,000                              |   | (37          | )%     | 3,664,000                                     |   |

 

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At October 31, 2003, we had $3.3 millionin cash and cash equivalents, a decrease from $4.4 million as ofOctober 31, 2002, which was a slight increase from $4.1 million in cashand cash equivalents as of October 31, 2001.  As of October 31, 2003 our working capital was approximately$602,000, which represented a decrease from working capital of approximately$2.3 million as of October 31, 2002. Our working capital of $2.3 million at October 31, 2002 representeda decrease from our working capital of $3.7 million at  October 31, 2001.

 

On September 29, 2003, we issued a pressrelease and filed a report on Form 8-K reporting our signing of a mergeragreement with Poet Holdings, Inc. and our proposed merger with Poet. ThroughOctober 31, 2003, we have incurred approximately $800,000 in merger related costs, consisting primarily oflegal and investment banking fees and we expect to incur approximately $300,000additional expenses in order to complete the merger, which involves registeringthe stock we would issue in the merger under the Securities Act and the holdingof a special stockholder meeting to consider and vote on the proposedmerger.  If the merger agreement withPoet is terminated without consummation of the proposed merger in certaincircumstances, which could include the failure of our shareholders to approvethe merger, we could become liable to pay Poet certain termination fees,ranging in amount from $500,000 to $1,000,000.

 

We maintain a revolving credit line with abank that expires in July 2004. The maximum amount that can be borrowed under the revolving credit lineis $5.0 million. As of October 31, 2003, there were $500,000 borrowings(drawn in October 2003) outstanding under this line and this balance wasrepaid in full in November 2003. As of October 31, 2002, there were no borrowings outstanding underthis line. As of October 31, 2001, there were $500,000 borrowings outstanding;and this balance was repaid in November 2001.  Borrowings are limited to 80% of eligible accounts receivable andare secured by a lien on substantially all of our assets.  Borrowings outstanding bear interest atprime rate plus 4.00% (8.00% at October 31, 2003). The amount availableunder this line fluctuates monthly based on the eligibility of our receivablesand is not indicative of future availability under this line. The loanagreement contains no financial covenants regarding our monthly or quarterlyprofitability or net asset position, and prohibits cash dividends and mergersand acquisitions without the bank’s prior approval.  The bank has consented to our proposed merger with Poet Holdings.

 

In fiscal 2003, operating activities used netcash of $1.1 million. In 2003, net loss of $2.4 million, was offset by anon-cash stock based compensation expense of $1.2 million and depreciation andamortization of $987,000 and a reduction of inventory and deferred revenue of$723,000 and $405,000, respectively.  Infiscal 2002, operating activities provided net cash of $509,000.  Net loss of $3.4 million in 2002 was offsetby a reduction of accounts receivable of $2.2 million and depreciation andamortization costs of $1.3 million.  Inthe ten months ended October 31, 2001, operating activities provided netcash of $325,000.  Our net loss of $7.2million for the ten month 2001 period, which was generated primarily in thefirst quarter of 2001, was offset by a reduction of accounts receivable of $4.8million, goodwill write-down of $555,000 and depreciation and amortization of$1.6 million.

 

In fiscal 2003, net cash of $527,000 was usedin investing activities, which included $260,000 of Mokume acquisition costsand $267,000 for the purchase of capital equipment needed to support ourgrowth.  In fiscal 2002, investingactivities provided $22,000 of net cash, which represented proceeds from thesale of obsolete equipment, offset by the purchase of other equipment.  In the ten month 2001 period net cash usedin investing activities was $171,000, for the purchase of equipment.

 

In fiscal 2003, net cash of $673,000 wasprovided by financing activities and included $500,000 borrowed under ourrevolving credit line and $177,000 of proceeds from the sale of common stock inconnection with our employee stock purchase program.  In fiscal 2002, we used $281,000 of net cash in financingactivities.  Repayments of borrowingsunder our bank line of $550,000 and principal payments of $56,000 under capitallease obligations were partially offset by proceeds of $325,000 from the sale ofcommon stock in connection with our employee stock purchase plan.  In the ten month 2001 period, net cash usedin financing activities was $338,000 due to repayments of borrowings under ourline of credit of $770,000, principal payments under our capital lease of$43,000 and the repurchase of common shares of $1,000 being partially offset by$476,000 in proceeds from the exercise of employee stock options and the saleof common stock to our employees under employee benefit plans.

 

At October 31, 2003, our commitments forcapital expenditures were not material.

 

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We believe that our current cash, cashequivalents and line of credit, and any net cash provided by operations, willbe sufficient to meet our anticipated cash needs for working capital andcapital expenditures for fiscal 2004, irrespective of whether or not theproposed merger with Poet Holdings, Inc. is consummated.  We base this assertion on the followingfactors:

 

•                  OurNet Days Sales Outstanding (DSO) at the end of 2003 was 64 days.  This important cash collection indicator hasbeen under 90 days consistently since the third quarter of 2001 and we arecommitted to maintaining this performance.

 

•                  Ourestimated  quarterly run rate foroperating expenses for the immediate future is in the range of $3.7 million to$4.2 million and is the lowest point since Versant became a public company in1996.

 

•                  Wehave a line of credit through July 2004 that is readily available toaddress short-term liquidity fluctuations. To date this credit line hasremained largely unutilized.  Theminimum amount that has been consistently available to us under this creditline, given its eligibility requirements, has been $1.5 million, while themaximum we have ever drawn down has been $1.0 million, and this for a period ofless than one month.

 

•                  Webelieve that, based on current market conditions, we might be able to raiseprivate financing if necessary, though such financing might require sales ofour stock at prices below prevailing market prices, which could dilute theinterests of existing shareholders. While we currently do not intend pursuing this option in the immediatefuture, this may become a more necessary focus should the proposed merger withPoet Holdings, Inc. not be consummated, particularly if we then becameobligated to pay Poet any termination fees pursuant to the terms of our mergeragreement with Poet.

 

If the proposed merger with Poet Holdings,Inc does indeed become effective, within the March 2004 timeframe, then weexpect the cash balance in the merged company to be within a range ofapproximately $6 million to $8 million upon the effective date. It is possible that, if the merger with Poet isapproved and consummated, shareholders of Poet and Versant who did not vote infavor of the merger may be able to exercise statutory dissenters’ appraisalrights in connection with the merger, which would potentially enable suchshareholders to receive cash payments from Versant equal to the fair marketvalue of their shares. The amounts that might have to be paid to satisfy suchappraisal rights are unknown, but would reduce the combined company’s cashreserves to the extent exercised.

 

Although we expect to effectively manage ourcash 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. The incremental cost requirements surrounding the proposed merger withPoet Holdings, Inc. has placed a significant further burden on the company’s cashresources.  Additional debt or equity financingmay be required or desirable, although it is not currently anticipated, and maynot be available to us on commercially reasonable terms, or at all.  In addition, debt or equity financing ifavailable, would require Poet’s pre-approval of such financing transaction,under the terms of our merger agreement with Poet and there is no assurancethat this approval would be forthcoming. The prices at which new investors would be willing to purchase oursecurities may be lower than the market value or trading price of our commonstock. The sale of additional equity or convertible debt securities couldresult in dilution to our shareholders, which could be substantial and mayinvolve the issuance of preferred securities that would have liquidation preferencesthat entitle holders of the preferred securities to receive certain amountsbefore holders of common stock in connection with an acquisition or businesscombination involving Versant or a liquidation of Versant. New investors mayalso seek agreements giving them additional voting control or seats on ourboard of directors.  Even if we wereable to obtain additional debt or equity financing, the terms of this financingmight significantly restrict our business activities and in some circumstances,might require us to obtain the approval of our shareholders, which could delayor prevent consummation of the financing transaction.  Cash may also be needed to acquire or invest in complementarybusinesses or products or to obtain the right to use complementary technologiesand we expect that, in the event of such an acquisition or investment, we willneed to seek additional debt or equity financing.

 

**RecentlyIssued Accounting Pronouncements**

 

In December 2002, the FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandards No. 148 (SFAS 148), *Accounting for Stock-Based Compensation - Transitionand Disclosure*. SFAS 148 amends 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

 

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addition, SFAS 148 amends the disclosure requirements of SFAS 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the 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 adoption of SFAS 148 did not have an effect on our financialposition, results of operations or cash flows.

 

In November 2002, the Emerging IssuesTask Force (EITF) reached a 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 iseffective for interim periods beginning after June 15, 2003. The adoptionof EITF 00-21did not have a material effect on our financial position, resultsof operations, or cash flows.

 

In November 2002, the FASB issuedInterpretation No. 45 (Interpretation 45), *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*,which clarifies disclosure and recognition/measurement requirements related tocertain guarantees.  The disclosurerequirements are effective for financial statements issued afterDecember 15, 2002 and the recognition/measurement requirements areeffective on a prospective basis for guarantees issued or modified afterDecember 31, 2002.  The adoption ofInterpretation 45 did not have a material effect on our financial position,results of operations or cash flows.

 

In July 2001, the FASB issued SFAS No.142, *Goodwilland Intangible Assets*, which supersedes 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 goodwill will no longer be subject toamortization. Due to our change in fiscal year-end from December 31 toOctober 31, we adopted SFAS No. 142 on November 1, 2002, from whichdate, we will no longer amortize goodwill.

 

In April 2002, the FASB issued SFAS No.145, *Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB SFAS No. 13, andTechnical Corrections*.  SFAS145 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 145also makes non-substantive technical corrections to existing pronouncements.SFAS No. 145 is effective for fiscal years beginning after May 15, 2002with earlier adoption encouraged.  Theprovisions of SFAS No. 145 did not have a material effect on our financialposition, results of operations, or cash flows.

 

In June 2002, the FASB issued SFAS No.146, *Accountingfor Costs Associated with Exit or Disposal Activities*.  SFAS No. 146 addresses financial accountingand reporting for costs associated with exit or disposal activities andnullifies Emerging Issues Task Force (EITF) Issue No. 94-3, *LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (Including Certain 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.  Theadoption of SFAS No. 146 did not have a material effect on our financialposition,  results of operations, orcash flows.

 

InMay 2003, the FASB issued Statement of Financial Accounting Standards No.150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity* (SFAS 150).  SFAS 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Itrequires that an issuer classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances). Many of thoseinstruments were previously classified as equity.  SFAS 150 is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. The adoption of SFAS 150 didnot have an effect on our financial position, results of operations or cashflows.

 

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**QuarterlyInformation (unaudited):**

 

Summarized quarterly supplementalconsolidated financial information for 2003 and 2002 is as follows:

 
|                              |   | **Fiscal 2003 Quarters Ended**            |   | **Fiscal 2002 Quarters Ended** |   |
|-----------------------------------|--------|-------------------------------------------|--------|--------------------------------|--------|
|                              |   | **Jan 31,**                               |   | **Apr 30,**                    |   | **Jul 31,** |   | **Oct 31,** |   | **Jan 31,** |   | **Apr 30,** |   | **Jul 31,** |   | **Oct 31,** |   |
|                              |   | **(in thousands, except per share data)** |   |
|                              |   |                                      |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                           |   | $                                         | 5,849  |                           | $      | 5,024 |   | $ | 5,429 |   | $ | 5,757 |   | $ | 6,104 |   | $ | 4,701 |   | $ | 4,449 |   | $ | 4,702 |   |
|                              |   |                                      |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                      |   | 3,765                                     |   | 3,021                          |   | 3,387 |   | 3,629 |   | 4,036 |   | 3,167 |   | 3,077 |   | 3,442 |   |
|                              |   |                                      |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  loss                   |   | (720                                      | )      | (802                           | )      | (142 | ) | (1,048 | ) | (618 | ) | (1,386 | ) | (1,280 | ) | (325 | ) |
|                              |   |                                      |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                          |   | (664                                      | )      | (772                           | )      | (153 | ) | (800 | ) | (578 | ) | (1,082 | ) | (1,323 | ) | (407 | ) |
|                              |   |                                      |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic net  loss per share         |   | (.05                                      | )      | (.06                           | )      | (.01 | ) | (.06 | ) | (0.05 | ) | (0.09 | ) | (0.11 | ) | (0.03 | ) |
|                              |   |                                      |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted  net  loss per share |   | $                                         | (.05   | )                              | $      | (.06 | ) | $ | (.01 | ) | $ | (.06 | ) | $ | (.05 | ) | $ | (.09 | ) | $ | (.11 | ) | $ | (.03 | ) |

 

**RiskFactors**

 

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

 

***Risks Related to OurBusiness***

 

***Wehave limited working capital and may experience difficulty in obtaining neededfunding, which may limit our ability to effectively pursue our businessstrategies.*** At October 31, 2003, we had $3.3 million in cash and cashequivalents and working capital of approximately $602,000 and we experienceddeclines in our cash and working capital in fiscal 2003. To date, we have notachieved profitability or positive cash flow on a sustained basis.  Although we believe that our current cash,cash equivalents, line of credit, and any net cash provided by operations willbe sufficient to meet our anticipated cash needs for working capital andcapital expenditures for the next twelve months, it is possible that events mayoccur that could render our current working capital reserves insufficient.  Because our revenue is unpredictable and asignificant portion of our expenses are fixed, a reduction in projected revenueor unanticipated requirements for cash outlays could deplete our limitedfinancial resources.  For example, ournew real-time business initiative may increase our operating expenses, and ifrevenues from the real-time business don’t materialize when anticipated ourworking capital could be adversely impacted. Impairment of our working capital would require us to make expensereductions and/or to raise funds through borrowing or debt or equityfinancing.  If we require additionalexternal funding, there can be no assurance that we will be able to obtain itunder our bank line of credit because borrowings under our credit line arelimited to eligible accounts receivable. In addition, when our bank line expires in July 2004, there can beno assurance that it will be renewed. Likewise, there can be no assurance that any equity or debt funding willbe available to us on favorable terms, if at all.  If we cannot secure adequate financing sources, then we would berequired to reduce our operating expenses, which would restrict our ability topursue our business objectives.

 

***Weare dependent on a limited number of products***.  Nearly all of our revenue to date has beenderived from two products, VDS and Versant enJin.  Consequently, if our ability to generate revenue from either ofthese products, particularly VDS, were negatively impacted, our business, cashflows and results of operations would be materially adversely affected.  Many factors could negatively impact ourability to generate revenue from VDS and enJin, including without limitationslowness in the general economy or in key industries we serve, such as thetelecommunications and financial services industries, the success ofcompetitive products of other vendors, reduction in the prices we can obtainfor our products due to competitive factors, the adoption of new technologiesor standards that make either product technologically obsolete or customer reluctanceto invest in object-oriented technologies. Although we plan to eventually diversify our product line through ourreal-time business initiative, there can be no assurance that currentlyreleased or future developed real-time products will facilitate this objective,nor that such products will be well received by the market.  Accordingly, any

 

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significant reduction in revenue levels from VDS or Versant enJin canbe expected to have a strong negative impact on our business and results ofoperation.

 

***Ourrevenue levels are not predictable. ***Ourrevenue has fluctuated dramatically on a quarterly basis, and we expect thistrend to continue.  These quarterlyfluctuations result from a number of factors, including:

 

•                  delaysby our customers in signing revenue-bearing contracts that were expected to beentered into in a particular fiscal quarter;

 

•                  generalmacroeconomic factors as they impact IT capital purchasing decisions;

 

•                  thelengthy sales cycle associated with our products;

 

•                  customerand market 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;

 

•                  uncertaintyregarding customer acceptance of our first real-time product, VRTF;

 

•                  failureto timely develop and launch successful new products;

 

•                  fluctuationsin domestic and foreign demand for our products and services, particularly inthe telecommunications, financial services, and defense markets;

 

•                  theimpact of new product introductions, both by us and by our competitors;

 

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

 

•                  theeffect of publications of opinions about us and our competitors and theirproducts;

 

•                  customerorder deferrals in anticipation of product enhancements or new productofferings by us or our competitors; and

 

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

 

***Wemay not be able to manage costs effectively given the unpredictability of ourrevenue.*** We expect to continue to maintain a relatively high level of fixedexpenses, including expenses related to our new real-time business. If plannedrevenue growth, including revenue from real-time products, does notmaterialize, our business, financial condition and results of operations willbe materially harmed.

 

***Ourcustomer concentration increases the potential volatility of our operatingresults.***  Asignificant portion of our total revenue has been, and we believe will continueto be, derived from a limited number of orders placed by largeorganizations.  For example, onecustomer, IBM (who subcontracts us for WebSphere consulting engagements ),represented 19% of total revenue in 2003 and 14% of our total revenue for2002.  The timing of large orders and oftheir fulfillment has caused, and in the future is likely to cause, materialfluctuations in our operating results, particularly on a quarterly basis. Inaddition, 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.

 

***Reduceddemand for our products and services may prevent us from achieving targetedrevenue and profitability. ***Ourrevenue and our ability to achieve and sustain profitability depend on theoverall demand for the software products and services we offer.  The general economic slowdown in the worldeconomy may have caused potential or existing customers to defer purchases ofour products and services and otherwise alter their purchasing patterns.  Capital spending in the informationtechnology sector generally has decreased over the past two years and many ofour customers and potential customers have experienced declines in theirrevenues and operations.  The terroristacts of September 11, 2001 also have

 

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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 continue to curtail or eliminate capital spending oninformation technology.  In addition, wehave experienced 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.

 

***Werely for revenue on the telecommunications and financial services industries,which are characterized by complexity and intense competition.***  Historically, we have been highly dependentupon the telecommunications industry and, more recently, on the financialservices market, and we are becoming increasingly dependent upon the defenseindustry for sales of VDS and Versant enJin. Our success in these areas is dependent, to a large extent, on generaleconomic conditions, our ability to compete with alternative technologyproviders and whether our customers and potential customers believe we have theexpertise and financial stability necessary to provide effective solutions inthese markets on an ongoing basis.  Ifthese conditions, among others, are not satisfied, we may not be successful ingenerating additional opportunities in these markets.  Currently, companies in these markets are scaling back theirtechnology expenditures and the telecommunications industry has in particularexperienced significant economic difficulties and consolidation trends whichcould jeopardize our ability to continue to derive revenue from customers inthat industry.  In addition, the typesof applications and commercial products for the telecommunications, financialservices and defense markets are continuing to develop and are rapidlychanging, and these markets are characterized by an increasing number of newentrants whose products may compete with ours. As a result, we cannot predict the future growth of (or whether therewill be future growth in) these markets, and demand for object-orienteddatabases and real-time e-business applications in these markets may notdevelop or be sustainable.  We also maynot be successful in attaining a significant share of these markets due tocompetition and other factors, such as our limited working capital.  Moreover, potential customers in thesemarkets generally develop sophisticated and complex applications that requiresubstantial consulting expertise to implement and optimize. This requires thatwe maintain a highly skilled consulting practice with specific expertise inthese markets. There can be no assurance that we can hire and retain adequatepersonnel for this practice.

 

***Wedepend on our international operations.***  A large portion of our revenue is derivedfrom customers located outside the United States.  For the year ended October 31, 2003, approximately 25% ofour total revenue was derived from customers outside the United States andCanada.  This requires that we operateinternationally and maintain a significant presence in internationalmarkets.  In addition, we also perform asignificant amount of engineering work in India through our wholly ownedsubsidiary located in Pune, India. Within our last fiscal year we have transitioned some of ourinternational sales efforts to a business model that employs localdistributors. While use of local distributors reduces certain sales andoperating expenses, it also makes our business more dependent on the skills andefforts of third parties and can decrease our profit margins.

 

Our international operations are subject to anumber of other risks.  These risksinclude, but are not limited to:

 

•                  longerreceivable collection periods;

 

•                  changesin regulatory requirements;

 

•                  dependenceon independent resellers;

 

•                  multipleand conflicting regulations and technology standards;

 

•                  importand export restrictions and tariffs;

 

•                  difficultiesand costs of staffing and managing foreign operations;

 

•                  potentiallyadverse tax consequences;

 

•                  foreignexchange rate fluctuations;

 

•                  theburdens of complying with a variety of foreign laws;

 

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•                  theimpact of business cycles, economic and political instability and potentialhostilities outside the United States; and

 

•                  limitedability to enforce agreements, intellectual property rights and other rights insome foreign countries.

 

In addition, in light of increasing globalsecurity concerns in the wake of the events of September 11, 2001, theremay be additional risks of disruption to our international salesactivities.  Any prolonged disruption inmarkets in which we derive significant revenue may potentially have an adverseimpact on our revenues and results of operations.

 

***Ourproducts 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.  Sales to oure-business customers are often concluded in shorter time intervals but on theother hand sales to the defense industry can take considerably longer.  Due in part to the strategic nature of ourproducts and associated expenditures, potential customers are typicallycautious in making product acquisition decisions.  While we believe that the sales cycle for real-time products isshorter than for VDS, it may be that our initial sales of real-time productsmay have even longer sales cycles as we strive to build credibility with newcustomers in different industries.  Thedecision to license our products generally requires us to provide a significantlevel of education to prospective customers regarding the uses and benefits ofour 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 for our products and therelatively large average dollar size of individual licenses, a lost or delayedsale could have a significant impact on our operating results for a particularperiod.

 

***Weare focusing our growth efforts on our new real-time computing business, whichpresents certain new risks.*** Our acquisition of Mokume Software inNovember 2002 initiated implementation of our strategy to develop a“real-time” business. Our strategic objective for this business is to expandour business base by using real-time technology, leveraged with our existingdata management technology, to develop new solutions designed to enable us toaddress new customers in different industries. To date we have developed one real-time product, VRTF, and hope toultimately develop additional real-time applications for the VRTF technology aspart of this business initiative However the real-time market is relatively newand our efforts to develop a real-time business will require us to sell andmarket our products to manufacturing companies and companies in other newindustries with which we have not had prior sales or marketing experience.  We believe that success in developing andselling real-time business products will require us to devote appropriateefforts to developing strong sales, marketing and development skills requiredto address new target markets. These efforts may increase our operating costs,and if we fail to timely generate revenue from our real-time business, ourworking capital and operating results could be adversely affected.  There can be no assurance that our effortsto pursue the real-time computing business will be successful or will not adverselyaffect our financial condition or results of operations, particularly in thenear term.

 

***We are subject to litigation and the risk offuture litigation***. We and certain of our present and former officers and directors werenamed as defendants in four class action lawsuits filed in the United StatesDistrict Court for the Northern District of California in 1998.  The complaint alleged violations of Sections10(b) and 20(a) of the Securities Exchange Actof 1934, or Exchange Act, andSecurities and Exchange Commission Rule 10b-5 promulgated under the ExchangeAct, in connection with public statements about Versant and its financialperformance. Although this case has been dismissed as of this date, there canbe no assurance that we will not be subject to similar litigation in thefuture.

 

***Risks Related to OurIndustry***

 

***Weface competition for our products.* **For our VDS product, we compete withcompanies offering object and relational database management systems.Object-oriented competitors include eXcelon (which was acquired by ProgressSoftware Corporation in 2002) and Objectivity, Inc. and Poet Holdings,Inc.  Traditional relational databasemanagement competitors include Oracle, Computer Associates, Sybase, IBM andMicrosoft.

 

In the e-business market our competitors canbe divided into two groups. First, we compete with relational databasemanagement companies, many of which have modified or are expected to modifytheir relational database management systems to incorporate object-orientedinterfaces and other functionality and claim that this object-relationalfunctionality is an adequate solution for integration with application servers.Second, we face competition from object-oriented companies such as eXcelon,Persistence Software and TopLink that provide components similar to those includedin our Versant enJin product offering. In order for our products to be wellaccepted in the e-business market, it is important for one or more of ourtechnical partnerships with application server vendors such as IBM and BEA tobecome deeper and more extensive.

 

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Many of our competitors, and especiallyOracle and Computer Associates, have longer operating histories, significantlygreater financial, 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 our currentand potential customers. Our competitors may be able to devote greaterresources to the development, promotion and sale of their products.  They alsomay have more direct access tocorporate decision-makers based on previous relationships and may be able torespond more quickly 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, operating resultsand financial condition.

 

***Wedepend on successful technology development.***  We believe that significant research anddevelopment expenditures will be necessary for us to remain competitive.  While we believe our research anddevelopment expenditures will improve our product lines, because of theuncertainty of software development projects, these expenditures will notnecessarily result in successful product introductions.  Uncertainties affecting the success ofsoftware development project introductions include technical difficulties,market conditions, competitive products and consumer acceptance of new productsand operating systems. In particular we expect that we will need to devotesubstantial effort to the development of new products in our real-timesolutions division.

 

We also face certain challenges inintegrating third-party technology with our products.  These challenges include the technological challenges ofintegration, which may result in development delays, and uncertainty regardingthe economic terms of our relationship with the third-party technologyproviders, which may result in delays of the commercial release of newproducts.

 

We have developed technology that will allowVersant enJin to support BEA WebLogic, IBM WebSphere and other J2EE-basedapplication servers; however, undiscovered bugs or errors may exist thatprevent us from achieving the functionality we seek with theseintegrations.  In addition, because JavaBean containers are specific to each application server vendor and no standardshave been adopted for these containers, we may not be able to take advantage ofour existing development work when propagating our solution for otherapplication server vendors.

 

Our future success will depend in part on ourability to integrate our products with those of vendors providing complementaryproducts.  Versant enJin and VDS must beintegrated with compilers, development tools, operating systems, and othersoftware and hardware components to produce a complete end user solution.  We may not receive the support of these third-partyvendors, some of which may compete with us, in integrating our products withtheir products.

 

***Wemust 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.

 

***Wemay be subject to claims of intellectual property infringement*. **We expect that developers ofobject-oriented technology will increasingly be subject to infringement claimsas the number of products, competitors and patents in our industry segmentgrows.  For example, we have receivedcorrespondence from a third party alleging that we received misappropriatedintellectual property from Mokume Software when we acquired Mokume and thatMokume had interfered with certain business relationship of that thirdparty.  We believe these claims lackmerit and we intend to defend them vigorously if they are pursued.  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.

 

***Wedepend on our personnel, for whom competition is intense. ***Our futureperformance depends in significant part upon the continued service of our keytechnical, sales and senior management personnel.  The loss of the services of one or more of our key employeescould have a material adverse effect on our business.  Our future success also depends on our continuing ability toattract, train and motivate highly qualified technical, sales and managerialpersonnel. Our current financial position may make it more difficult to attractand retain highly talented individuals due to constraints on our ability tooffer compensation at levels that may be offered by larger competitors.

 

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***Risks Related to our Stock***

 

***Our common stock islisted on the Nasdaq SmallCap Market. ***Wedo not currently meet the listing requirements necessary for our common stockto be listed on the Nasdaq National Market System, or NMS.  Effective on October 1, 2002, wetransferred the listing of our common stock from the NMS to The Nasdaq SmallCapMarket.  The listing of our common stockon The Nasdaq SmallCap Market may be perceived as a negative by investors andmay adversely affect the liquidity and trading price of our common stock. Wemay be unable to re-list our common stock on the NMS.

 

***In order for our commonstock to continue to be listed on The Nasdaq SmallCap Market, we must satisfythe Nasdaq SmallCap listing requirements, and there can be no assurance that wewill be able to do so. ***Inorder for our common stock to continue to be listed for trading on The NasdaqSmallCap Market, we must continue to satisfy the listing requirements of theNasdaq SmallCap Market.  Although thecontinued listing requirements of the Nasdaq SmallCap Market are not asdemanding as those of the NMS, they do, among other things, require that ourstock have a minimum bid price of $1.00 per share and that we either(i) have stockholders’ equity of $2,500,000, or (ii) have $500,000 innet income or (iii) that the market value of our publicly held shares be $35million or more.  For several reasons,including the fact that the bid price of our common stock has in the past beenbelow $1.00 per share for a significant time period, there remains asignificant risk that our common stock will cease to qualify for listing on theNasdaq SmallCap Market.  We regainedcompliance with the Nasdaq SmallCap minimum bid price requirement onSeptember 5, 2003.  AtOctober 31, 2003, we did not meet The Nasdaq Smallcap’s net incomerequirement, but our stockholders’ equity was approximately $3.3 million, inexcess of the Nasdaq SmallCap requirement. If our common stock is delisted from trading on the Nasdaq SmallCapMarket, then the trading market for our common stock, and the ability of ourstockholders to trade our shares and obtain liquidity and fair market pricesfor their Versant shares may be significantly impaired and the market price ofVersant’s common stock may decline significantly.

 

***We may engage infuture acquisitions that dilute our stockholders and cause us to incur debt orassume contingent liabilities.***  As part of our strategy, we expects toreview opportunities to buy other businesses or technologies that wouldcomplement our current products, expand the breadth of our markets or enhancetechnical capabilities, or that may otherwise offer growth opportunities.  In the event of any future acquisitions, wecould:

 

•      issue stock that would dilute currentstockholders' percentage ownership;

 

•      incur debt; or

 

•      assume liabilities.

 

These purchases also involve numerous risks, including:

 

•      problems combining the purchasedoperations, technologies or products;

 

•      unanticipated costs;

 

•      diversion of management's attention fromour core business;

 

•      adverse effects on existing businessrelationships with suppliers and customers;

 

•      risks associated with entering markets inwhich we have no or limited prior experience; and

 

•      potential loss of key employees ofpurchased organizations.

 

We cannot assure you that we will be able to successfully integratePoet's business or any businesses, products, technologies or personnel that wemight purchase in the future.

 

***Our stock price isvolatile.*** Our revenue, operating results and stock price have been and maycontinue to be subject to significant volatility, particularly on a quarterlybasis.  We have previously experiencedrevenue and earnings results that were significantly below levels expected bysecurities analysts and investors, which have had an immediate and significantadverse effect on the trading price of our common stock.  This may occur again in the future.  Additionally, as a significant portion ofour revenue often occurs late in the quarter, we may not learn of revenueshortfalls until late in the quarter, which, when announced, could result in aneven more immediate and adverse effect on the trading price of our commonstock.

 

***Ownership of ourstock is concentrated. ***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 thatVertex holds the equivalent of 4,027,034 shares (assuming conversion of alltheir preferred shares at the current conversion rate of two common shares foreach preferred share and exercise of all their warrants), and assuming that Versanthas 18,220,962 shares outstanding (which amount consists of all outstandingshares of our common stock as of January 1, 2004,  plus shares resulting from the conversion ofall preferred shares at their current conversion rate and the exercise of allwarrants held by Vertex), Vertex and its affiliates would beneficially ownapproximately 22% of our common stock.

 

***The holders of ourpreferred stock have a substantial liquidation preference over the holders ofour common stock.*** The outstanding shares of our preferred stock held by Vertex and otherpreferred stockholders currently are entitled to a liquidation preference ofapproximately $14 million.  This meansthat, in the event of an acquisition of Versant, our preferred shareholderswould be entitled to receive approximately the first $14 million of acquisitionproceeds before holders of common stock would be entitled to receive anyproceeds of the acquisition transaction. It is a condition of our proposed merger with Poet Holdings that all ouroutstanding shares of Series A preferred stock be converted into common stockat an increased conversion rate of not more than three common shares for eachshare of Series A preferred stock, as opposed to the original conversion rateof two common shares for each share of Series A preferred stock. However, theproposed merger is subject to several conditions, including the approval ofboth Versant’s and Poet’s shareholders, and there can be no assurance that themerger will in fact be consummated or that our preferred stock will beconverted. There are no plans to convert Versant’s preferred stock into commonstock if the merger with Poet is not consummated.

 

***We may desire toraise additional funds through debt or equity financings, which would dilutethe ownership of our existing stockholders and possibly subordinate certain oftheir rights to rights of new investors***.  We may choose to raise additional funds indebt or equity financings if they are available to us on terms we believereasonable to increase our working capital, strengthen our financial positionor to make acquisitions. Any sales of additional equity or convertible debtsecurities would result in dilution of the equity interests of our existingshareholders, which could be substantial. Additionally, if we issue shares of preferred stock or convertible debtto raise funds, the holders of those securities might be entitled to various

 

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preferential rights over the holders of our common stock, including repaymentof their investment, and possibly additional amounts, before any payments couldbe made to holders of our common stock in connection with an acquisition of thecompany.  Such preferred shares, ifauthorized, might be granted rights and preferences that would be senior to, orotherwise adversely affect, the rights and the value of Versant’s commonstock.  Also, new investors may requirethat we enter into voting arrangements that give them additional voting controlor representation on our board of directors. The terms of our merger agreement with Poet restrict us from raisingfunds in certain equity or debt financings without Poet’s consent.

 

***Certain RisksRelated to our Proposed Merger with Poet Holdings, Inc.***

 

As previously noted in this report, we haveentered into a merger agreement with Poet Holdings, Inc. which provides that,subject to certain terms and conditions, Poet would be merged into our whollyowned subsidiary Puma Acquisition, Inc. and become a wholly owned subsidiary ofVersant.  The proposed merger with Poetoffers certain opportunities but also certain risks, including but not limitedto the following:

 

***Our stock price,business and working capital may be adversely affected if the merger is notcompleted.*** Completion of the merger is subject to the satisfaction of severalclosing conditions, including obtaining required approvals of the merger andrelated matters from Versant’s and Poet’s shareholders. Versant and Poet may beunable to obtain such approvals on a timely basis or at all and may be unableto satisfy other closing conditions.  Ifthe proposed merger with Poet is not completed, the market price of our commonstock may decline.  In addition, ourbusiness and operations may be harmed to the extent that customers, suppliers andothers believe that we cannot effectively compete in the marketplace withoutthe merger, or if there is customer, investor or employee uncertainty regardingour future business direction and strategy on a standalone basis.  We also have, and expect to continue, toincur significant transaction costs in connection with the merger.  These costs are primarily associated withcombining the businesses of the two companies and the fees of financialadvisors, attorneys, consultants and accountants, and will have a negativeimpact on our cash balances and working capital.

 

***If the mergeragreement is terminated under certain circumstances we may become obligated topay a substantial termination fee*. **If the merger agreement with Poet isterminated under specified circumstances described in the merger agreement,Versant may become obligated to pay Poet a termination fee of between $500,000to $1.0 million in connection with the termination of the mergeragreement.  One of the circumstances inwhich we could become responsible to pay a termination fee to Poet would be ifPoet’s stockholders approved the merger and our shareholders failed to approvethe merger or certain related transactions. The merger agreement also provides for other circumstances in which wemight become obligated to pay a termination fee.  Any payment of any such termination fee would materially reduceour cash and working capital.

 

***Failureto complete the merger could negatively affect Versant’s and Poet’s ability toenter into alternative transactions and the merger agreement restricts ourability to enter into other transactions.***  If the merger is terminated and we determineto seek another merger or business combination, there can be no assurance thatwe will be able to find a partner at an attractive price.  In addition, while the merger agreement isin effect, we are prohibited from directly or indirectly soliciting, initiatingor encouraging or entering into a merger, consolidation, purchase of assets,tender offer or other business combination with any party except where ourboard of directors determines in good faith and after consultation with outsidelegal counsel and its financial advisor, that the alternative proposal issuperior to the merger and that it must engage in discussions or negotiationsregarding the transaction to comply with its fiduciary duties to itsshareholders under applicable law. As a result of this prohibition, Poet andVersant are precluded from discussing alternative takeover proposals during theterm of the merger agreement, and may lose an opportunity for a transactionwith another potential partner at a favorable price if the merger is notcompleted. In certain circumstances Poet or Versant may also be obligated topay a termination fee if they enter into such an alternative transaction withincertain time periods, even after termination of their merger agreement.

 

***Ourability to enter into financing transactions is restricted by the mergeragreement. ***Underthe terms of the merger agreement, Poet has the right, exercisable at itsoption, to terminate the merger agreement if we enter into financingtransactions to raise or obtain funds through the issuance and sale of sharesof our capital stock and/or other equity or debt securities, and if theproceeds from any such financing exceed $2,000,000 and Poet elects to terminatethe merger agreement, we would be obligated to reimburse Poet for its mergerexpenses, which could be substantial.

 

**Item 7A: Quantitativeand Qualitative Disclosures About Market Risk**

 

***Foreigncurrency hedging instruments. ***Wetransact business in various foreign currencies and, accordingly, we aresubject to exposure from adverse movements in foreign currency exchangerates.  To date, the effect of changesin foreign currency exchange rates on revenue and operating expenses has notbeen material.  Operating expensesincurred by our

 

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foreign subsidiaries are denominated primarily in localcurrencies.  We currently do not usefinancial instruments to hedge these operating expenses.  We intend to assess the need to utilizefinancial instruments to hedge currency exposures on an ongoing basis.

 

We do not use derivative financialinstruments for speculative trading purposes.

 

***Interestrate risk.* **Ourcash equivalents primarily consist of money market accounts, accordingly, ourinterest rate risk is de minimus.

 

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**Item 8.  Financial Statements and Supplementary Data.**

 

**Report of Independent Certified PublicAccountants**

 

To the Board of Directors and ShareholdersVersant Corporation

 

We have audited the accompanying consolidated balance sheet of VersantCorporation and subsidiaries (the “Company”) as of October 31, 2003 andthe related consolidated statements of operations and comprehensive income,shareholders’ equity, and cash flows for the year then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audit.  The accompanyingconsolidated statements of operations, shareholders’ equity, and cash flows ofVersant Corporation and subsidiaries for the ten-month period endedOctober 31, 2001 were audited by other auditors who have ceased operations.  Those auditors expressed an unqualifiedopinion on those consolidated financial statements and the related financialstatement schedule in their report dated December 12, 2001.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Versant Corporation and subsidiaries as of October 31, 2003, and theconsolidated results of their operations and their consolidated cash flows forthe year then ended, in conformity with accounting principles generallyaccepted in the United States of America.

 

We have also audited Schedule II for the year endedOctober 31, 2003. In our opinion, this schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

 

 
|   | /s/ Grant Thornton LLP |   |
|--------|------------------------|--------|

 

 

San Jose, California

November 14, 2003

 

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**REPORT OF INDEPENDENT AUDITORS**

 

The Board of Directors and ShareholdersVersant Corporation:

 

We have audited the accompanying consolidated balance sheet of VersantCorporation and subsidiaries as of October 31, 2002, and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows forthe year then ended.  In connection withour audit of the consolidated financial statements, we also have audited therelated financial statement schedule listed in Item 15(a)2.  These consolidated financial statements andthe related financial statement schedule are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements and the related financial statement schedule based on ouraudit.  The accompanying consolidatedstatements of operations, shareholders’ equity, and cash flows for VersantCorporation for the ten-month period ended October 31, 2001 were auditedby other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidatedfinancial statements and the related financial statement schedule in theirreport dated December 12, 2001.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides 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 subsidiaries as of October 31, 2002, and the results oftheir operations and their cash flows for the year then ended in conformitywith accounting principles generally accepted in the United States ofAmerica.  Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as whole, present fairly, in allmaterial respects, the information set forth therein.

 

 
|   | /s/ KPMG LLP |   |
|--------|--------------|--------|

 

Mountain View, CaliforniaNovember 26, 2002

 

38

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*Note: This is a copy of a report previously issued by Arthur Andersen LLP, ourformer independent accountants.  Thisreport has not been reissued by Arthur Andersen LLP in connection with thefiling of this Annual Report on Form 10-K.*

 

**REPORT OF INDEPENDENTPUBLIC ACCOUNTANTS**

 

To the Board of Directors and Shareholders ofVersant Corporation:

 

We have audited the accompanying consolidatedbalance sheet of Versant Corporation (a California corporation) and itssubsidiaries (the Company) as of October 31, 2001 and the relatedconsolidated statements of operations, shareholders’ equity and cash flows forthe period from January 1, 2001 to October 31, 2001 and for the yearended December 31, 2000.  Theseconsolidated financial statements and the schedule referred to below arethe responsibility of the Company’s management. Our responsibility is to expressan opinion on these consolidated financial statements and Schedule IIbased on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the consolidated financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Versant Corporation and its subsidiaries****asof October 31, 2001 and the results of their operations and their cashflows for the period from January 1, 2001 to October 31, 2001 and forthe year ended December 31, 2000, in conformity with accounting principlesgenerally accepted in the United States.

 

Our audits were made for the purpose offorming an opinion on the basic consolidated financial statements taken as awhole. The schedule listed under Schedule II is presented for thepurpose of complying with the Securities and Exchange Commission’s rules and isnot a part of the basic consolidated financial statements. Thisschedule has been subjected to the auditing procedures applied in ouraudits of the basic consolidated financial statements and, in our opinion,fairly states in all material respects the financial data required to be setforth therein in relation to the basic consolidated financial statements takenas a whole.

 

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

 

 

San Jose, CaliforniaDecember 12, 2001

 

39

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**VERSANT CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

(In thousands)

 
|                                                                                                                                                   |   | **October 31,  2003** |       | **October 31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                             |   |                       | ** ** |                       | ** ** |
|                                                                                                                                                   |   |                       |       |                       |       |
| Current  assets:                                                                                                                                       |   |                       |       |                       |       |
| Cash and  cash equivalents                                                                                                                             |   | $                          | 3,311      |                       | $          | 4,427 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $258 and $687 at  October 31, 2003 and 2002, respectively                         |   | 4,023                      |       | 3,997                      |       |
| Inventory                                                                                                                                              |   | —                     |       | 882                        |       |
| Other  current assets                                                                                                                                  |   | 623                        |       | 464                        |       |
| Total  current assets                                                                                                                                  |   | 7,957                      |       | 9,770                      |       |
|                                                                                                                                                   |   |                       |       |                       |       |
| Property and  equipment, net                                                                                                                           |   | 1,232                      |       | 1,890                      |       |
| Other assets                                                                                                                                           |   | 543                        |       | 21                         |       |
| Intangibles,  net of accumulated amortization of $91 at October 31, 2003                                                                          |   | 389                        |       | —                     |       |
| Goodwill                                                                                                                                               |   | 948                        |       | 240                        |       |
|                                                                                                                                                   |   |                       |       |                       |       |
|                                                                                                                                                   |   | $                          | 11,069     |                       | $          | 11,921 |   |
|                                                                                                                                                   |   |                       |       |                       |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                          |   |                       |       |                       |       |
|                                                                                                                                                   |   |                       |       |                       |       |
| Current  liabilities:                                                                                                                                  |   |                       |       |                       |       |
| Line of  credit                                                                                                                                        |   | 500                        |       | —                     |       |
| Accounts  payable                                                                                                                                      |   | 739                        |       | 1,292                      |       |
| Accrued  liabilities                                                                                                                                   |   | 2,148                      |       | 3,068                      |       |
| Current  portion of deferred revenue                                                                                                                   |   | 3,905                      |       | 3,054                      |       |
| Current  portion of deferred rent                                                                                                                      |   | 63                         |       | 30                         |       |
| Total  current liabilities                                                                                                                             |   | 7,355                      |       | 7,444                      |       |
|                                                                                                                                                   |   |                       |       |                       |       |
| Long-term  liabilities, net of current portion:                                                                                                        |   |                       |       |                       |       |
|                                                                                                                                                   |   |                       |       |                       |       |
| Long-term  portion of deferred revenue                                                                                                                 |   | 83                         |       | 529                        |       |
| Long-term  portion of deferred rent                                                                                                                    |   | 309                        |       | 372                        |       |
| Total  long-term liabilities                                                                                                                           |   | 392                        |       | 901                        |       |
| Commitment  and Contingencies (Note 5)                                                                                                                 |   |                       |       |                       |       |
|                                                                                                                                                   |   |                       |       |                       |       |
| Shareholders’  equity:                                                                                                                            |   |                       |       |                       |       |
| Convertible  preferred stock, Authorized 3,000 shares, issued and outstanding 1,314 in  2003 and 2002, liquidation preference of $13,991, no par value |   | 4,912                      |       | 4,912                      |       |
| Common  stock, Authorized 45,000 shares, issued   and outstanding 14,648 and 12,376 at October 31, 2003 and 2002,  respectively, no par value     |   | 55,096                     |       | 52,790                     |       |
| Accumulated  deficit                                                                                                                                   |   | (56,708                    | )          | (54,319                    | )          |
| Accumulated  other comprehensive income                                                                                                                |   | 22                         |       | 193                        |       |
| Total  shareholders’ equity                                                                                                                       |   | 3,322                      |       | 3,576                      |       |
|                                                                                                                                                   |   | $                          | 11,069     |                       | $          | 11,921 |   |

 

See accompanying notes toconsolidated financial statements.

 

40

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**VERSANT CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands, except per shareamounts)

 
|                                                                                                                                                              |   | **Year Ended  October 31,** |   | **Ten Months Ended  October 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|----------------------------------------|--------|
|                                                                                                                                                              |   | **2003**                         |   | **2002**                               |   | **2001** |   |
|                                                                                                                                                              |   |                             |   |                                   |   |   |   |
| Revenue:                                                                                                                                                          |   |                             |   |                                   |   |   |   |
| License                                                                                                                                                           |   | $                                | 9,082  |                                   | $      | 10,106 |   | $ | 7,362 |   |
| Maintenance                                                                                                                                                       |   | 6,076                            |   | 5,300                                  |   | 5,135 |   |
| Professional  services                                                                                                                                            |   | 6,901                            |   | 4,550                                  |   | 11,412 |   |
| Total  revenue                                                                                                                                                    |   | 22,059                           |   | 19,956                                 |   | 23,909 |   |
|                                                                                                                                                              |   |                             |   |                                   |   |   |   |
| Cost of  revenue:                                                                                                                                                 |   |                             |   |                                   |   |   |   |
| License                                                                                                                                                           |   | 843                              |   | 902                                    |   | 634 |   |
| Maintenance                                                                                                                                                       |   | 1,312                            |   | 1,291                                  |   | 1,191 |   |
| Professional  services                                                                                                                                            |   | 6,011                            |   | 4,041                                  |   | 10,546 |   |
| Amortization  of intangibles                                                                                                                                      |   | 91                               |   | —                                 |   | — |   |
| Total cost  of revenue                                                                                                                                            |   | 8,257                            |   | 6,234                                  |   | 12,371 |   |
|                                                                                                                                                              |   |                             |   |                                   |   |   |   |
| Gross profit                                                                                                                                                      |   | 13,802                           |   | 13,722                                 |   | 11,538 |   |
|                                                                                                                                                              |   |                             |   |                                   |   |   |   |
| Operating  expenses:                                                                                                                                              |   |                             |   |                                   |   |   |   |
| Marketing  and sales (excludes stock based compensation of $5 for the year ended  October 31, 2003 and $22, for the ten months ended October 31,  2001) |   | 7,698                            |   | 7,854                                  |   | 8,482 |   |
| Research and  development                                                                                                                                         |   | 4,340                            |   | 5,835                                  |   | 5,464 |   |
| General and  administrative (excludes stock based compensation of $1,204, for the year  ended October 31, 2003)                                              |   | 3,267                            |   | 3,440                                  |   | 2,963 |   |
| Stock based  compensation                                                                                                                                         |   | 1,209                            |   | —                                 |   | 22 |   |
| Amortization  of goodwill                                                                                                                                         |   | —                           |   | 202                                    |   | 396 |   |
| Write down  of goodwill                                                                                                                                           |   | —                           |   | —                                 |   | 555 |   |
| Restructuring  costs                                                                                                                                              |   | —                           |   | —                                 |   | 668 |   |
| Total  operating expenses                                                                                                                                         |   | 16,514                           |   | 17,331                                 |   | 18,550 |   |
|                                                                                                                                                              |   |                             |   |                                   |   |   |   |
| Loss from  operations                                                                                                                                             |   | (2,712                           | )      | (3,609                                 | )      | (7,012 | ) |
|                                                                                                                                                              |   |                             |   |                                   |   |   |   |
| Other income  (expense):                                                                                                                                          |   |                             |   |                                   |   |   |   |
| Foreign  currency transaction gain (loss)                                                                                                                         |   | 343                              |   | (49                                    | )      | (118 | ) |
| Interest  expense                                                                                                                                                 |   | (2                               | )      | (2                                     | )      | (22 | ) |
| Interest and  other income, net                                                                                                                                   |   | 56                               |   | 338                                    |   | 87 |   |
| Total other  expense                                                                                                                                              |   | 397                              |   | 287                                    |   | (53 | ) |
| Loss before  taxes                                                                                                                                                |   | (2,315                           | )      | (3,322                                 | )      | (7,065 | ) |
| Provision  for income taxes                                                                                                                                       |   | 74                               |   | 68                                     |   | 93 |   |
| Net Loss                                                                                                                                                          |   | $                                | (2,389 | )                                      | $      | (3,390 | ) | $ | (7,158 | ) |
|                                                                                                                                                              |   |                             |   |                                   |   |   |   |
| Basic and diluted net loss per share:                                                                                                                             |   | $                                | (0.17  | )                                      | $      | (0.28 | ) | $ | (0.59 | ) |
|                                                                                                                                                              |   |                             |   |                                   |   |   |   |
| Basic and diluted weighted average shares  used in per share calculations                                                                                         |   | 13,682                           |   | 12,267                                 |   | 12,041 |   |

 

See accompanying notes toconsolidated financial statements.

 

41

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**VERSANT CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**(In thousands, except share amounts)

 
|                                                                                                 |   | **Convertible Preferred** |       | **Common** |       | **Accumulated  Deficit** |       | **Accumulated  Other  Comprehensive  Income** |       | **Total  Shareholders’  Equity** |       | **Total  Comprehensive  Income (loss)** |       |
|------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|------------|------------|--------------------------|------------|-----------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------|------------|
|                                                                                                 |   | **Shares**                |       | **Amount** |       | **Shares**               |       | **Amount**                                    |       |                                  |       |                                    |       |
|                                                                                                 |   |                      | ** ** |       | ** ** |                     | ** ** |                                          | ** ** |                                  | ** ** |                                    | ** ** |   | ** ** |   | ** ** |
| **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 |   |   |   |
| Stock based 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 |   |   |   |
|                                                                                                 |   |                      |       |       |       |                     |       |                                          |       |                                  |       |                                    |       |   |   |   |   |
| ESPP and exercises of stock  options                                                                 |   | —                    |       | —     |       | 97,696                   |       | 72                                            |       | —                                |       |                                    |       | 72 |   |   |   |
| Exercise of stock options                                                                            |   |                      |       |       |       | 113,229                  |       | 105                                           |       |                                  |       |                                    |       | 105 |   |   |   |
| Stock based  compensation                                                                       |   |                      |       |       |       | 674,800                  |       | 1,209                                         |       |                                  |       |                                    |       | 1,209 |   |   |   |
| Issuance of common stock in  Mokume acquisition                                                      |   |                      |       |       |       | 1,385,600                |       | 920                                           |       |                                  |       |                                    |       | 920 |   |   |   |
| Net loss                                                                                             |   | —                    |       | —     |       | —                   |       | —                                        |       | (2,389                                | )          |                                    |       | (2,389 | ) | (2,389 | ) |
|                                                                                                 |   |                      |       |       |       |                     |       |                                          |       |                                  |       |                                    |       |   |   |   |   |
| Other comprehensive income,  net of tax:                                                             |   |                      |       |       |       |                     |       |                                          |       |                                  |       |                                    |       |   |   |   |   |
| Foreign currency  translation adjustments                                                            |   | —                    |       | —     |       | —                   |       | —                                        |       |                                  |       | (171                                    | )          | (171 | ) | (171 | ) |
| Total comprehensive loss                                                                             |   |                      |       |       |       |                     |       |                                          |       |                                  |       |                                    |       |   |   | $ | (2,560 | ) |
| **Balance at October 31, 2003**                                                                 |   | 1,313,743                 |       | $          | 4,912      |                     | 14,647,640 |                                          | $          | 55,096                                |       | $                                       | (56,708    | ) | $ | 22 |   | $ | 3,322 |   |   |   |

 

See accompanying notes toconsolidated financial statements.

 

42

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**VERSANT CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**(In thousands)

 
|                                                                                       |   | **Year Ended  October 31,  2003** |       | **Year Ended  October 31,  2002** |       | **Ten Months  Ended October 31,  2001** |       |
|--------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|
|                                                                                       |   |                                   | ** ** |                                   | ** ** |                                         | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                  |   |                                   |       |                                   |       |                                         |       |
| Net Loss                                                                                   |   | $                                      | (2,389     | )                                      | $          | (3,390                                       | )          | $ | (7,158 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |   |                                   |       |                                   |       |                                         |       |
| Non-cash  portion of restructuring costs                                                   |   | —                                 |       | —                                 |       | 108                                          |       |
| Depreciation  and amortization                                                             |   | 987                                    |       | 1,333                                  |       | 1,561                                        |       |
| Write-down  of goodwill                                                                    |   | —                                 |       | —                                 |       | 555                                          |       |
| Stock based  compensation                                                                  |   | 1,209                                  |       | —                                 |       | 22                                           |       |
| Write off  equipment                                                                       |   | 22                                     |       | 50                                     |       | —                                       |       |
| Provision  for doubtful accounts receivable                                                |   | (132                                   | )          | 296                                    |       | 302                                          |       |
| Changes in current assets and liabilities,  net of acquisitions:                           |   |                                   |       |                                   |       |                                         |       |
| Accounts  receivable                                                                       |   | 106                                    |       | 2,185                                  |       | 4,780                                        |       |
| Other  current assets and inventory                                                        |   | 723                                    |       | (90                                    | )          | (207                                         | )          |
| Other assets                                                                               |   | (522                                   | )          | (21                                    | )          | 21                                           |       |
| Accounts payable                                                                           |   | (553                                   | )          | 53                                     |       | 551                                          |       |
| Accrued  liabilities                                                                       |   | (916                                   | )          | 490                                    |       | (676                                         | )          |
| Deferred  revenue                                                                          |   | 405                                    |       | 2                                      |       | 437                                          |       |
| Deferred  rent                                                                             |   | (31                                    | )          | (399                                   | )          | 29                                           |       |
| Net cash  provided by (used in) operating activities                                       |   | (1,091                                 | )          | 509                                    |       | 325                                          |       |
|                                                                                       |   |                                   |       |                                   |       |                                         |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                  |   |                                   |       |                                   |       |                                         |       |
| Acquisition  costs                                                                         |   | (260                                   | )          | —                                 |       | —                                       |       |
| Purchase of  property and equipment                                                        |   | (267                                   | )          | (3                                     | )          | (171                                         | )          |
| Proceeds  from sale of property and equipment                                              |   | —                                 |       | 25                                     |       | —                                       |       |
| Net cash  provided by (used in) investing activities                                       |   | (527                                   | )          | 22                                     |       | (171                                         | )          |
|                                                                                       |   |                                   |       |                                   |       |                                         |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                  |   |                                   |       |                                   |       |                                         |       |
| Proceeds  from sale of common stock, net                                                   |   | 177                                    |       | 325                                    |       | 476                                          |       |
| Repurchase  of common shares                                                               |   | —                                 |       | —                                 |       | (1                                           | )          |
| Net  borrowings (payments) under short-term note and bank loan                             |   | 500                                    |       | (550                                   | )          | (770                                         | )          |
| Principal  payments under capital lease obligations                                        |   | (4                                     | )          | (56                                    | )          | (43                                          | )          |
| Net cash  provided by  (used in) financing  activities                                |   | 673                                    |       | (281                                   | )          | (338                                         | )          |
|                                                                                       |   |                                   |       |                                   |       |                                         |       |
| EFFECTS OF  EXCHANGE RATE CHANGES                                                          |   | (171                                   | )          | 76                                     |       | 5                                            |       |
|                                                                                       |   |                                   |       |                                   |       |                                         |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                      |   | (1,116                                 | )          | 326                                    |       | (179                                         | )          |
| CASH AND  CASH EQUIVALENTS AT BEGINNING OF PERIOD                                          |   | 4,427                                  |       | 4,101                                  |       | 4,280                                        |       |
| **CASH AND CASH EQUIVALENTS AT END OF PERIOD**                                             |   | $                                      | 3,311      |                                   | $          | 4,427                                        |       | $ | 4,101 |   |
|                                                                                       |   |                                   |       |                                   |       |                                         |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                                         |   |                                   |       |                                   |       |                                         |       |
| Cash paid  for:                                                                            |   |                                   |       |                                   |       |                                         |       |
| Interest                                                                                   |   | $                                      | 2          |                                   | $          | 1                                            |       | $ | 22 |   |
| Foreign  withholding and state income taxes                                                |   | $                                      | 74         |                                   | $          | 62                                           |       | $ | 74 |   |
|                                                                                       |   |                                   |       |                                   |       |                                         |       |
| 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 |   |
| Mokume  acquisition for stock                                                              |   | $                                      | 920        |                                   | —     |                                         | —     |   |

 

See accompanying notes toconsolidated financial statements.

 

43

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**VERSANT CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTSOctober 31, 2003**

 

**1.****                        Organization,Operations and Liquidity**

 

Versant Corporation was incorporated inCalifornia in August 1988. References to the “Company” in these Notes to Consolidated FinancialStatements refer to Versant Corporation and its subsidiaries.  The Company is involved in the design,development, marketing and support of high performance object databasemanagement, data access and data integration software systems.

 

The Company is subject to the risksassociated with similar companies in a comparable stage of development. Theserisks include, but are not limited to, fluctuations in operating results,seasonality, a lengthy sales cycle, dependence on the continued acceptance ofobject database technology, competition, a limited customer base, dependence onkey individuals, dependence on international operations, foreign currencyexchange rate fluctuations, product concentration, and the ability toadequately finance its ongoing operations.

 

As of October 31, 2003, the Company hadnot achieved business volume sufficient to restore profitability and positivecash flow consistently, on an annual basis. The Company operated at a net loss of $2.4 million in 2003, $3.4 millionin 2002, and a net loss of $7.2 million in the ten months endedOctober 31, 2001. Management anticipates funding future operations andrepaying its debt obligations from current cash resources and future cash flowsfrom operations.  If financial resultsfall short of projections, additional debt or equity may be required and theCompany may need to implement further cost controls.  No assurances can be given that these efforts will be successful,if required.

 

OnSeptember 10, 2001, the Company filed a report on Form 8-K with theSecurities and Exchange Commission reporting a decision by the Board ofDirectors to change the Company’s fiscal year-end from December 31 toOctober 31. This change was made to better align the Company’s customers’procurement cycle and the Company’s financial reporting cycles. As a result ofthis change, the Company has a ten-month transition period for the ten monthsended October 2001.  The Company’sfiscal year 2002 commenced on November 1, 2001.

 

**2.****                        Summaryof Significant Accounting Policies**

 

Principles of Consolidation

 

The consolidated financial statements includethe accounts 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 toamounts in the 2002 and 2001 financial statements  to conform to the 2003 presentation.

 

Use of Estimates

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamount of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

At October 31, 2003 and October 31,2002, the carrying values of cash, accounts receivable, accounts payable andaccrued liabilities approximated their fair values since they were short-termin nature. Debt approximated fair value as it was short-term in nature and hadstated interest rates based on current market rates.

 

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Cash and Cash Equivalents

 

The Company considers all highly liquid debtsecurities with an original maturity of three months or less to be cashequivalents.  Cash and cash equivalentsconsist of checking and money market accounts. As of October 31, 2003 and2002 cash balances held in foreign financial institutions were $1.2 and $1.3million, respectively.

 

Inventory

 

Inventory is carried at the lower of averagecost or market and consisted of third-party software held for resale.

 

Property and Equipment

 

Property and equipment, at cost, consisted ofthe following (in thousands):

 
|                                                 |   | **October 31, 2003** |   | **October 31, 2002** |   |
|------------------------------------------------------|--------|---------------------------|--------|---------------------------|--------|
| Computer  equipment                                  |   | $                         | 3,965  |                      | $      | 3,831 |   |
| Furniture  and fixtures                              |   | 1,967                     |   | 1,885                     |   |
| Software                                             |   | 686                       |   | 664                       |   |
| Leasehold  improvements                              |   | 1,178                     |   | 1,178                     |   |
|                                                 |   | 7,796                     |   | 7,558                     |   |
| Less—accumulated  depreciation and amortization |   | (6,564                    | )      | (5,668                    | )      |
|                                                 |   | $                         | 1,232  |                      | $      | 1,890 |   |

 

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.

 

Reserve for Doubtful Accounts

 

The Company initially records a provision fordoubtful accounts based on historical experience and then adjusts thisprovision at the end of each reporting period based on a detailed assessment ofour accounts receivable and allowance for doubtful accounts.  Inestimating the provision for doubtful accounts, the Company considers: (i) theaging of the accounts receivable; (ii) trends within and ratios involving theage of the accounts receivable; (iii) the customer mix in each of the agingcategories and the nature of the receivable (i.e. license, consulting,maintenance, etc.); (iv) Our historical provision for doubtful accounts; (v)the credit-worthiness of each customer; (vi) the economic conditions of thecustomer’s industry; and (vii) general economic conditions, among other factors.

 

Goodwill

 

The Company has allocated goodwill at theenterprise level and periodically evaluates whether events and circumstanceshave occurred that indicate the remaining goodwill may have been impaired. Whenfactors indicate that goodwill should be evaluated for possible impairment, theCompany will use an estimate of undiscounted future net cash flows of the assetto determine if 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 that goodwill has been impaired, the impairment isrecorded based on the excess of the carrying value of the goodwill over itsfair value.

 

Research and Development

 

Costs incurred in the research anddevelopment of software products are expensed as incurred until technologicalfeasibility has been established.  Oncetechnological feasibility is established, these costs are capitalized underSFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leasedor Otherwise Marketed”.  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 were insignificant and, therefore, no costs havebeen capitalized to date.

 

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Accrued Liabilities

 

Accrued liabilities consisted of thefollowing (in thousands):

 
|                 |   | **October 31, 2003** |   | **October 31, 2002** |   |
|----------------------|--------|---------------------------|--------|---------------------------|--------|
| Payroll and  related |   | $                         | 934    |                      | $      | 786 |   |
| Customer  deposits   |   | 72                        |   | 1,255                     |   |
| Taxes  payable       |   | 637                       |   | 293                       |   |
| Other                |   | 505                       |   | 734                       |   |
| Total                |   | $                         | 2,148  |                      | $      | 3,068 |   |

 

Deferred Revenue

 

Deferred revenue represents amounts receivedfrom customers under license and maintenance agreements that the Company is notyet entitled to recognize as revenue because the earnings process has not beencompleted.

 

Deferred revenue consisted of the following(in thousands):

 

 
|                     |   | **October 31, 2003** |   | **October 31, 2002** |   |
|--------------------------|--------|---------------------------|--------|---------------------------|--------|
| Maintenance              |   | $                         | 3,655  |                      | $      | 2,914 |   |
| Training and  consulting |   | 31                        |   | 36                        |   |
| License                  |   | 302                       |   | 633                       |   |
| Total                    |   | $                         | 3,988  |                      | $      | 3,583 |   |

 

Foreign Currency Translation

 

The functional currency of the Company’ssubsidiaries is the local currency. Accordingly, all assets and liabilities are translated into U.S. dollarsat the current exchange rate as of the applicable balance sheet date.  Revenues and expenses are translated at theaverage exchange rate prevailing during the period.  Gains and losses resulting from the translation of the financialstatements are included in accumulated other comprehensive income (loss) in theaccompanying consolidated statements of shareholders’ equity.  Currently, the Company does not employ aforeign currency hedge program utilizing foreign currency exchange contracts asthe foreign currency transactions, and risks to date have not been significant.Foreign currency transaction gains and losses are reported in results ofoperations in the period in which they occur.

 

Guarantees

 

Our software license agreements generallyinclude certain provisions for indemnifying customers against liabilities ifour software products infringe a third party’s intellectual property rights. Todate, we have not incurred any material costs as a result of suchindemnifications and have not accrued any liabilities related to suchobligations in our consolidated financial statements.

 

Our software license agreements alsogenerally include a warranty that our software products will substantiallyoperate as described in the applicable program documentation. We also warrantthat services we perform will be provided in a manner consistent with industrystandards.  To date, we have notincurred any material costs associated with these warranties.

 

Revenue Recognition

 

The Company recognizes revenue in accordancewith the provisions of Statement of Position (SOP) 97-2, “Software RevenueRecognition” and SOP 98-9, “Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions”.  Revenue consists mainly of revenue earned under software licenseagreements, maintenance agreements and for consulting and training activities.

 

The Company uses the residual method torecognize revenue when a license agreement includes one or more elements to bedelivered at a future date.  If there isan undelivered element under the license arrangement, the Company defersrevenue based 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 records it as revenue using contractaccounting.

 

46

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Revenue from software license arrangements,including prepayment revenue, is recognized when all of the following criteriaare met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred; (3) the fee is fixed and determinable; and (4) collection isprobable.  If an acceptance period orother contingency exists, revenue is recognized upon satisfaction of thecontingency, customer acceptance or expiration of the acceptance period.

 

The Company licenses its products toend-users, value-added resellers and distributors through two types ofperpetual licenses—development licenses and deployment licenses.  Development licenses are typically sold on aper seat basis and authorize a customer to develop an application program thatuses VDS or Versant enJin.  Before thatcustomer may deploy an application that it has developed under a developmentlicense, it must purchase deployment licenses based on the number of computersconnected to the server that will run the application using the Company’sdatabase management system.  For certainapplications, the Company offers deployment licenses priced on a per userbasis.  Pricing of VDS and Versant enJinvaries according to several factors, including the number of computer serverson which the application will run and the number of users that will be able toaccess the server at any one time. Customers may elect to simultaneously purchase development anddeployment licenses for an entire project. These development and deploymentlicenses may also provide for prepayment of a nonrefundable amount for futuredeployment.

 

Resellers, including value-added resellersand distributors, 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,and when collection is probable.

 

Revenue from the Company’s resale ofthird-party products is recorded at total contract value with the correspondingcost included 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 usingthe following 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 the Company’s senior management.

 

The Company defers revenue from maintenanceand support arrangements and recognizes it ratably over the term of thearrangement, 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

 

Accumulated and other comprehensive income(loss) presented in the accompanying consolidated balance sheets consists ofcumulative foreign currency translation adjustments. The tax effects of thecomponents of the comprehensive income (loss) are insignificant.

 

Net Income (Loss) Per Share

 

Basic net income (loss) per share is computedby dividing 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 weighted averagenumber of shares outstanding plus the dilutive potential common shares.  The dilutive effect of stock options iscomputed 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.

 

47

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The reconciliation of the numerators anddenominators of the basic and diluted net loss per share computations is asfollows (in thousands, except per share amounts):

 
|                                                 |   | **Income (Loss)  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|------------------------------------------------------|--------|--------------------------------|--------|---------------------------|--------|-----------------------|--------|
|                                                 |   |                           |   |                      |   |                  |   |
| **FOR THE YEAR ENDED OCTOBER 31, 2003:**        |   |                           |   |                      |   |                  |   |
| Basic and  diluted net loss per share                |   | $                              | (2,389 | )                         | 13,682 |                  | $      | (0.17 | ) |
| **FOR THE YEAR ENDED OCTOBER 31, 2002:**        |   |                           |   |                      |   |                  |   |
| Basic and  diluted net loss per share                |   | $                              | (3,390 | )                         | 12,267 |                  | $      | (0.28 | ) |
| **FOR THE TEN MONTHS ENDED OCTOBER 31,  2001:** |   |                           |   |                      |   |                  |   |
| Basic and  diluted net loss per share                |   | $                              | (7,158 | )                         | 12,041 |                  | $      | (0.59 | ) |

 

The following potential shares of commonstock have been excluded from the computation of diluted net loss per sharebecause the effect would have been anti-dilutive (in thousands):

 
|                                                           |   | **Year Ended  October 31, 2003** |   | **Year Ended  October 31, 2002** |   | **Ten Months Ended  October 31, 2001** |   |
|----------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|---------------------------------------------|--------|
| Shares  issuable under stock options                           |   | 3,918                                 |   | 3,947                                 |   | 3,243                                       |   |
| Shares  issuable pursuant to warrants to purchase common stock |   | 1,333                                 |   | 1,333                                 |   | 1,458                                       |   |
| Shares  issuable upon conversion of preferred stock            |   | 2,627                                 |   | 2,627                                 |   | 2,627                                       |   |
|                                                           |   | 7,878                                 |   | 7,907                                 |   | 7,328                                       |   |

 

The weighted average exercise price of stockoptions outstanding was $2.66, $3.35, and $3.89 as of October 31 2003,October 31, 2002, and October 31, 2001, respectively. The weightedaverage exercise price of warrants was $2.13 as of October 31, 2003, October 31,2002 and October 31, 2001.

 

Stock-based Compensation

 

The Company applies APB Opinion No. 25 andrelated interpretations in accounting for its option plans, and grants optionsat or above the underlying market price of its common stock.  Had compensation cost for the Company’sstock plans and employee stock purchase plan been determined based on the fairvalue at the grant dates for the awards calculated in accordance with SFASNo.123, the Company’s net loss and net loss per share would have increased tothe pro forma amounts indicated below (in thousands except for per shareamounts):

 
|                                             |   |        |       | **Year Ended  October 31,  2003** |       | **Year Ended  October 31,  2002** |       | **Ten Months  Ended  October 31,  2001** |       |
|--------------------------------------------------|--------|-------------|------------|----------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|
|                                             |   |        | ** ** |                                   | ** ** |                                   | ** ** |                                          | ** ** |
| Net loss                                         |   | As reported |       | $                                      | (2,389     | )                                      | $          | (3,390                                        | )          | $ | (7,158 | ) |
| Stock  compensation recognized under APB 25      |   |        |       | 1,209                                  |       | —                                 |       | —                                        |       |
| Compensation  expense under SFAS 123 related to: |   |        |       |                                   |       |                                   |       |                                          |       |
| Stock based  compensation                        |   |        |       | (1,209                                 | )          | —                                 |       | —                                        |       |
| Stock option  plans                              |   |        |       | (1,361                                 | )          | (2,057                                 | )          | (2,096                                        | )          |
| Employee  stock purchase plans                   |   |        |       | (109                                   | )          | (138                                   | )          | (165                                          | )          |
|                                             |   | Pro forma   |       | $                                      | (3,859     | )                                      | $          | (5,585                                        | )          | $ | (9,419 | ) |
|                                             |   |        |       |                                   |       |                                   |       |                                          |       |
| Basic net  loss per share                        |   | As reported |       | $                                      | (0.17      | )                                      | $          | (0.28                                         | )          | $ | (0.59 | ) |
|                                             |   | Pro forma   |       | $                                      | (0.28      | )                                      | $          | (0.46                                         | )          | $ | (0.78 | ) |
|                                             |   |        |       |                                   |       |                                   |       |                                          |       |
| Diluted net  loss per share                      |   | As reported |       | $                                      | (0.17      | )                                      | $          | (0.28                                         | )          | $ | (0.59 | ) |
|                                             |   | Pro forma   |       | $                                      | (0.28      | )                                      | $          | (0.46                                         | )          | $ | (0.78 | ) |

 

The fair value of each option grant isestimated on the date of grant using the Black-Scholes option-pricing modelwith the following assumptions:

 

48

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|                     |   | **Year Ended  October 31,  2003** |       | **Year Ended  October 31,  2002** |       | **Ten Months  Ended  October 31,  2001** |       |
|--------------------------|--------|----------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|
|                     |   |                                   | ** ** |                                   | ** ** |                                          | ** ** |
| Risk free  interest rate |   | 2.25                                   | %          | 3.5                                    | %          | 4.3                                           | %          |
| Dividend  yield          |   | 0                                      | %          | 0                                      | %          | 0                                             | %          |
| Volatility               |   | 113                                    | %          | 107                                    | %          | 107                                           | %          |
| Expected  life           |   | 3 years                                |       | 3 years                                |       | 3 years                                       |       |

 

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

 
|                     |   | **Year Ended  October 31,  2003** |   | **Year Ended  October 31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   |
|--------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------|--------|
| Risk free  interest rate |   | 1.81                                   | %      | 2.39                                   | %      | 4.42                                          | %      |
| Dividend  yield          |   | 0                                      | %      | 0                                      | %      | 0                                             | %      |
| Volatility               |   | 107                                    | %      | 107                                    | %      | 107                                           | %      |
| Expected  life           |   | 0.5-2 years                            |   | 0.5-2 years                            |   | 0.5-2 years                                   |   |

 

Segment and Geographic Information

 

The Company is organized geographically andby line of business.  The Company hasthree major line of business reporting segments: license, support andconsulting/training.  The Company’schief operating decision-maker (the Company’s CEO) evaluates each of these lineof business reporting segments on a regular basis.  However, the Company also evaluates certain line of businesssegments by vertical industries as well as by product categories.  While management evaluates results in anumber of different ways, the line of business management structure is theprimary basis upon which it assesses financial performance and allocatesresources.

 

The license line of business includes twoprincipal product offerings: a sixth generation object oriented databasemanagement system, Versant Developer Suite or VDS (formerly ODBMS), and VersantenJin, a transaction accelerator for application servers. Versant enJinaccelerates Internet transactions for the application server environment. The supportline of business provides customers with a wide range of support services thatinclude on-site telephone or internet access to support personnel, as well assoftware upgrades.  The consulting andtraining line of business provides customers with a wide range of consultingand training services to assist them in evaluating, installing and customizingVDS or Versant enJin, as well as training classes on the use and operation ofthe Company’s products.

 

The accounting policies of the line ofbusiness reporting segments are the same as those described in the summary ofsignificant accounting policies. The Company does not track assets by reportingsegments.  Consequently, it is notpracticable to show assets by reporting segment.

 

The table below presents a summary ofreporting segments (in thousands):

 
|                                   |   | **Year Ended  October 31,  2003** |   | **Year Ended  October 31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   |
|----------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------|--------|
| Revenues  from unaffiliated customers: |   |                                   |   |                                   |   |                                          |   |
| License                                |   | $                                      | 9,082  |                                   | $      | 10,106                                        |   | $ | 7,362 |   |
| Support                                |   | 6,076                                  |   | 5,300                                  |   | 5,135                                         |   |
| Consulting  and training               |   | 6,901                                  |   | 4,550                                  |   | 11,412                                        |   |
| Total  revenue                         |   | 22,059                                 |   | 19,956                                 |   | 23,909                                        |   |
|                                   |   |                                   |   |                                   |   |                                          |   |
| Gross  profit:                         |   |                                   |   |                                   |   |                                          |   |
| License                                |   | 8,239                                  |   | 9,204                                  |   | 6,728                                         |   |
| Support                                |   | 4,764                                  |   | 4,009                                  |   | 3,944                                         |   |
| Consulting  and training               |   | 890                                    |   | 509                                    |   | 866                                           |   |
| Amortization  of intangibles           |   | (91                                    | )      | —                                 |   | —                                        |   |
| Total gross  profit                    |   | 13,802                                 |   | 13,722                                 |   | 11,538                                        |   |
|                                   |   |                                   |   |                                   |   |                                          |   |
| Other  operating expenses              |   | 15,305                                 |   | 17,331                                 |   | 18,528                                        |   |
| Stock based  compensation expense      |   | 1,209                                  |   | —                                 |   | 22                                            |   |
| Other income  (expense)                |   | 397                                    |   | 287                                    |   | (53                                           | )      |
| Loss before  taxes                     |   | $                                      | (2,315 | )                                      | $      | (3,322                                        | )      | $ | (7,065 | ) |

 

49

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The table below presents the Company’srevenue by geographic region (in thousands):

 
|                            |   | **Year Ended  October 31,  2003** |   | **Year Ended  October 31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   |
|---------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------|--------|
| Total  revenue attributable to: |   |                                   |   |                                   |   |                                          |   |
| United  States                  |   | $                                      | 16,622 |                                   | $      | 13,510                                        |   | $ | 17,438 |   |
| Germany                         |   | 2,001                                  |   | 2,404                                  |   | 2,286                                         |   |
| France                          |   | 99                                     |   | 338                                    |   | 885                                           |   |
| United  Kingdom                 |   | 2,590                                  |   | 2,618                                  |   | 2,470                                         |   |
| Australia                       |   | 43                                     |   | 138                                    |   | 292                                           |   |
| Japan                           |   | 656                                    |   | 713                                    |   | 538                                           |   |
| Other                           |   | 48                                     |   | 235                                    |   | —                                        |   |
| Total                           |   | $                                      | 22,059 |                                   | $      | 19,956                                        |   | $ | 23,909 |   |

 

The Company’s long-lived assets residing incountries other than the United States are insignificant and thus have not beendisclosed.

 

Concentration of Credit Risk

 

Financial instruments that potentiallysubject the Company to a concentration of credit risk principally consist ofaccounts receivable. The Company performs periodic credit evaluation of itscustomers’ financial condition. The Company generally does not requirecollateral on accounts receivable because the majority of the Company’scustomers are large, well established companies.  The Company provides reserves for estimated credit losses inaccordance with management’s ongoing evaluation.

 

In the year ended October 31, 2003, IBMrepresented 19% of total revenues.  Inthe year ended October 31, 2002, IBM represented 14% of totalrevenues.  In the ten months endedOctober 31, 2001, two customers accounted for approximately 28% and 11% oftotal revenue, respectively.  Twocustomers each represented 15% and IBM represented 13% of accounts receivableat October 31, 2003. One customer represented 15% of accounts receivableat October 31, 2002.

 

**3.****                        RestructuringCosts**

 

On October 31, 2001, the Companyimplemented a restructuring plan aimed at optimizing performance inEurope.  The primary goal was to reduceoperating expenses, while maintaining current revenue streams in Europe. As aresult, the Company changed its distribution in France from a wholly ownedsubsidiary to an independent distributor. The Company incurred one-time costs related to employee severancepayments, related benefit and outplacement expenses, termination of thebuilding lease and accounting and legal costs associated with the closure ofthe office and the write-off of the carrying value of fixed assets. The totalcost of the restructuring was estimated at $668,000 and was recorded asrestructuring costs in operating expenses in the ten months endedOctober 31, 2001.

 

The following table summarizes the Company’srestructuring activity through October 31, 2003:

 
| **Restructuring  Costs**                           |   | **Balance at  October 31, 2001** |    | **FY 2003  Usage** |   | **FY 2003  Usage** |   | **Balance at  October 31, 2003** |   |
|----------------------------------------------------|--------|---------------------------------------|---------|--------------------|--------|--------------------|--------|---------------------------------------|--------|
| 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 | ) | $ | — |   |

 

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**4.****                        RecentlyIssued Accounting Pronouncements**

 

In December 2002, the FASB issuedStatement of Financial Accounting Standards No. 148 (SFAS 148), *Accountingfor Stock-Based Compensation - Transition and Disclosure*. SFAS 148amends 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 has adopted the disclosure provisions of SFAS 148herein.  The adoption of SFAS 148 had nomaterial effect on our financial position, results of operation or cash flows.

 

In November 2002, the EITF reached aconsensus on Issue No. 00-21 (EITF 00-21), *Revenue Arrangements with Multiple Deliverables*.EITF 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which the vendor will perform multiple revenue generatingactivities. EITF 00-21 is effective for interim periods beginning afterJune 15, 2003. The adoption of EITF 00-21 had no material effect on ourfinancial position, results of operations or cash flows.

 

In November 2002, the FASB issuedInterpretation No. 45 (Interpretation 45), *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*,which clarifies disclosure and recognition/measurement requirements related tocertain guarantees.  The disclosurerequirements are effective for financial statements issued afterDecember 15, 2002 and the recognition/measurement requirements areeffective on a prospective basis for guarantees issued or modified afterDecember 31, 2002.  The adoption ofInterpretation 45 had no material effect on our financial position, results ofoperations or cash flows.

 

In July 2001, the FASB issued SFAS No.142, *Goodwilland Intangible Assets*, which supersedes 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 afterDecember 31, 2001, existing goodwill is no longer subject to amortization.Due to the Company’s 2001 change in fiscal year-end from December 31 toOctober 31, the Company adopted SFAS No. 142 effective November 1,2002. As of October 31, 2002, the Company had goodwill of $948,000, whichwill no longer be amortized Had SFAS 142 been effective in fiscal 2002 and2001, reported net income and earnings per share would have been adjusted asfollows:

 
|                                           |   | **For the Year Ended October 31,** |   |
|------------------------------------------------|--------|-----------------------------------------|--------|
| **($000s  except for loss-per-share amounts)** |   | **2003**                                |   | **2002** |   | **2001** |   |
|                                           |   |                                    |   |   |   |   |   |
| Reported net  loss                             |   | $                                       | (2,389 | ) | $ | (3,390 | ) | $ | (7,158 | ) |
|                                           |   |                                    |   |   |   |   |   |
| Add back:  Goodwill amortization               |   | —                                  |   | 202 |   | 396 |   |
|                                           |   |                                    |   |   |   |   |   |
| Adjusted net  loss                             |   | $                                       | (2,389 | ) | $ | (3,188 | ) | $ | (6,762 | ) |
|                                           |   |                                    |   |   |   |   |   |
| **Basic and diluted loss per share:**          |   |                                    |   |   |   |   |   |
|                                           |   |                                    |   |   |   |   |   |
| Reported net  loss                             |   | $                                       | (0.17  | ) | $ | (0.28 | ) | $ | (0.59 | ) |
|                                           |   |                                    |   |   |   |   |   |
| Goodwill  amortization                         |   | —                                  |   | 0.02 |   | 0.03 |   |
|                                           |   |                                    |   |   |   |   |   |
| Adjusted net  loss                             |   | $                                       | (0.17  | ) | $ | (0.26 | ) | $ | (0.56 | ) |

 

51

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In April 2002, the FASB issued SFAS No.145, *Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB SFAS No. 13, andTechnical Corrections*.  SFAS145 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 afterMay 15, 2002 with earlier adoption encouraged. The adoption of SFAS No.145 did not have a material effect on the Company’s financial position, resultsof operations or cash flows.

 

In June 2002, the FASB issued SFAS No.146, *Accountingfor Costs Associated with Exit or Disposal Activities*.  SFAS No. 146 addresses financial accountingand reporting for costs associated with exit or disposal activities andnullifies EITF Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (Including CertainCosts Incurred in a Restructuring)*. This statement requires recognition of a liability for a cost associatedwith an exit or disposal activity when the liability is incurred, as opposed towhen the entity commits to an exit plan under EITF No. 94-3. This statementalso establishes that fair value is objective for initial measurement of theliability. The provisions of this statement are effective for exit or disposalactivities that are initiated after December 31, 2002. The adoption ofSFAS No. 146 did not have a material effect on the Company’s financialposition, results of operations or cash flows.

 

InMay 2003, the FASB issued Statement of Financial Accounting Standards No.150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity* (SFAS 150).  SFAS 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Itrequires that an issuer classify a financial instrument that is within its scopeas a liability (or an asset in some circumstances). Many of those instrumentswere previously classified as equity. SFAS 150 is effective for financial instruments entered into or modifiedafter May 31, 2003, and otherwise is effective at the beginning of thefirst interim period beginning after June 15, 2003.  The adoption of SFAS 150 did not have amaterial effect on our financial position, results of operations or cash flows.

 

**5.****                        LeaseObligations**

 

In November 1996, the Company enteredinto an agreement to lease its corporate headquarters facility under a ten-yearoperating lease agreement commencing on June 1, 1997 and expiring onMay 31, 2007.  The terms of thelease provide for certain increases in rental payments during the leaseterm.  Rental expense under thisagreement, including contractual payment increases is recognized on astraight-line basis.  The Company alsoleases field office space in Europe and India, generally under multi-yearoperating lease agreements. Consolidated rent expense for the year ended October 31, 2003, theyear ended October 31, 2002 and the ten month period endedOctober 31, 2001, was approximately $1,425,000, $1,545,000, and$1,405,000, respectively.

 

The Company’s future annual minimum leasepayments at October 31, 2003 under non-cancelable operating leases were asfollows (in thousands):

 
| **Year  Ending October 31,** |   | **Amount** |   |
|-----------------------------------|--------|------------|--------|
| 2004                              |   | 1,364      |   |
| 2005                              |   | 1,378      |   |
| 2006                              |   | 1,347      |   |
| 2007                              |   | 1,511      |   |
|                              |   | $          | 5,600  |   |
|                                   |        |            |        |  |

 

**6.****                        Lineof Credit**

 

The Company has a revolving credit line witha wholly owned subsidiary of its existing bank that expires on July 18,2004.  The maximum amount that can beborrowed under this line is $5.0 million. As of October 31, 2003, there was $500,000 outstanding on thisline. Borrowings are limited to the amount of eligible accounts receivable andare secured by a lien on substantially all of the Company’s assets.  Any borrowings would bear interest at thebank’s prime rate plus 4.00% (8.00% at October 31, 2003). The loan agreementcontains no financial covenants, but prohibits the payment of cash dividendsand mergers and acquisitions without the bank’s prior approval.

 

52

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**7.****                        Shareholders’Equity**

 

Series A Convertible Preferred Stock

 

Preferred stock consists of Series A ConvertiblePreferred Stock.  Each share of Series Ais convertible, at the election of the holder, into two shares of common stock.The holders of Series A are generally entitled to a number of votes equalto 50% of the number of shares of common stock into which the Series A isconvertible.  A consolidation or mergerof the Company which effects a change in control is deemed to be aliquidation.  The holders of SeriesA are also provided with certain voting protective provisions.  See also Note 12 to these notes toconsolidated financial statements.

 

1996 Equity Incentive Plan

 

In May 1996, the Company’s Board ofDirectors adopted the 1996 Equity Incentive Plan (the “1996 Equity Plan”), andthe Company’s shareholders approved the 1996 Equity Plan in June 1996.  The 1996 Equity Plan provides for the grantof stock options and stock bonuses and the issuance of restricted stock by theCompany to its employees, officers, directors, consultants, independentcontractors and advisors. Any authorized shares that are not issued or subjectto outstanding grants under the Company’s 1989 Stock Option Plan becameavailable for grant and issuance in connection with future awards under the1996 Equity Plan.  As ofOctober 31, 2003, 4,843,143 shares of common stock had been authorized forissuance under the 1996 Equity Plan; this includes any shares previouslyissuable under the 1989 Option Plan and now issuable under the 1996 EquityPlan.  As of October 31, 2003,1,407,385 shares remained available for future option grants and 3,435,758options are outstanding under the 1996 Equity Plan.

 

1996 Directors Stock Option Plan

 

In May 1996, the Company’s Board ofDirectors adopted the 1996 Directors Stock Option Plan (the “Directors Plan”),and the Company’s shareholders approved the Directors Plan inJune 1996.  The Directors Planprovides for the grant of nonqualified stock options to non-employee directorsof the Company, including automatic grants of options to purchase 10,000 sharesof common stock to non-employee directors that were granted concurrently withthe Company’s initial public offering, options to new non-employee directors topurchase 40,000 shares of common stock granted on the date on which the newdirector joins the Board and an additional option to purchase 20,000 shares ofcommon stock to each eligible director on each anniversary date of his initialoption grant under the Directors Plan if he has served continuously as a memberof the Board since the date he was first granted an option under the DirectorsPlan.  The exercise price of all optionsgranted under the Directors Plan is the fair market value of the common stockon the date of grant.  All optionsgranted under the Directors Plan vest as to 50% of the shares on each of thefirst two anniversaries following the date of grant, provided the optioneecontinues as a member of the Board or as a consultant to the Company.  As of October 31, 2003, the Company hadauthorized 525,000 shares of Common stock for issuance under the DirectorsPlan.  As of October 31, 2003,230,000 shares remained available for future option grants and 295,000 optionswere outstanding under the 1996 Directors Stock Option Plan.

 

Shares Reserved for Future Issuance

 

As of October 31, 2003, the Company hadreserved shares of common stock for the following purposes:

 

| Employee  stock purchase plan                   |   | 344,056   |   |
|-------------------------------------------------|--------|-----------|--------|
| Stock  options available for grant              |   | 1,637,385 |   |
| Conversion  of preferred stock                  |   | 2,627,486 |   |
| Stock  options issued to non-employees          |   | 68,500    |   |
| Exercise of  warrants outstanding               |   | 1,332,796 |   |
| Exercise of  employee stock options outstanding |   | 3,662,258 |   |
|                                            |   | 9,672,481 |   |

 

53

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Stock Options

 

Option activity under all of the Company’soption plans is as follows:

 
|                                  |   | **Options  Available for  grant** |       | **Number of  Shares  outstanding** |       | **Weighted  Average  Exercise Price** |       |
|---------------------------------------|--------|-----------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
|                                  |   |                              | ** ** |                               | ** ** |                                  | ** ** |
| **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**                      | ** ** | **$**                                 | **3.35**   | ** ** |
| Authorized                            |   | 250,000                           |       | —                             |       | —                                |       |
| Granted                               |   | (1,429,695                        | )          | 1,429,695                          |       | 0.91                                  |       |
| Exercised                             |   | —                            |       | (113,229                           | )          | 0.93                                  |       |
| Canceled                              |   | 1,344,981                         |       | (1,344,981                         | )          | 2.87                                  |       |
| **Balance at October 31, 2003**  |   | **1,637,385**                     | ** ** | **3,730,758**                      | ** ** | **$**                                 | **2.66**   | ** ** |

 

The following table summarizes information concerning outstanding andexercisable options at October 31, 2003.

 
|                 |   | **Options Outstanding**                             |       |                                               |       | **Options Exercisable**                |       |
|----------------------|--------|-----------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------|------------|
| **Exercise  Prices** |   | **Number  Outstanding   at October 31,  2003** |       | **Weighted  Average  Remaining  Contractual Life** |       | **Weighted  Average  Exercise  Price** |       | **Number  Exercisable at  October 31,  2003** |   | **Weighted  Average  Exercise  Price** |   |
|                 |   |                                                | ** ** |                                               | ** ** |                                   | ** ** |   | ** ** |   | ** ** |
| From $0.42  to $0.61 |   | 242,834                                             |       | 9.12                                               |       | $                                      | 0.55       |   | 68,475 |   | $ | 0.55 |   |
| From $0.65  to $0.90 |   | 766,095                                             |       | 9.07                                               |       | 0.87                                   |       | 196,559 |   | 0.88 |   |
| From $1.05  to $1.60 |   | 897,634                                             |       | 7.84                                               |       | 1.45                                   |       | 639,397 |   | 1.41 |   |
| From $1.66  to $2.50 |   | 610,797                                             |       | 6.47                                               |       | 2.20                                   |       | 530,161 |   | 2.24 |   |
| From $2.66  to $4.00 |   | 421,592                                             |       | 6.70                                               |       | 3.10                                   |       | 386,870 |   | 3.11 |   |
| From $4.13  to $5.69 |   | 327,521                                             |       | 6.19                                               |       | 5.00                                   |       | 326,742 |   | 5.00 |   |
| From $6.31  to $8.19 |   | 456,385                                             |       | 5.21                                               |       | 7.39                                   |       | 456,189 |   | 7.39 |   |
| $ 18.00              |   | 7,900                                               |       | 3.98                                               |       | 18.00                                  |       | 7,900 |   | 18.00 |   |
|                 |   | 3,730,758                                           |       | 7.35                                               |       | 2.66                                   |       | 2,612,293 |   | 3.31 |   |
|                      |        |                                                     |            |                                                    |            |                                        |            |  |  |  |  |  |  |

 

1996 Employee Stock Purchase Plan

 

In May 1996, the Board adopted the 1996Employee Stock Purchase Plan (the “Purchase Plan”). The Company’s shareholdersapproved the Purchase Plan in June 1996. At that time, the Company reserved 650,000 shares of common stock forissuance under the Purchase Plan.  ThePurchase Plan enables eligible employees to purchase common stock at 85% of thelower of the fair market value of the Company’s common stock on the firstbusiness day of each offering period, which is 24 months in length, or the lastday of each purchase period, which is 6 months in length. For the year endedOctober 31, 2003, employees purchased 97,696 shares of common stock at anaverage price of $0.74 per share. For the year ended October 31, 2002,employees purchased 232,092 shares of common stock at an average price of $1.32per share.

 

Stock Based Compensation

 

The Company recorded $337,000 of stock basedcompensation expense in 1999 related to 125,000 options granted to a publicrelations firm pursuant to a November 1, 1999 agreement.  These options were exercisable in full at aweighted

 

54

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average of  $4.45 per vestedshare.  The agreement also granted amonthly retainer of $5,000 for services provided.  These options expired in November of 2002.  In January of 2001, the Company renewedthe agreement, which includes compensation to the public relations firm forservices rendered at a monthly rate of $6,000 and 62,500 non-qualified stockoptions under its 1996 Equity Incentive Plan. Of the 62,500 options granted,6,500 vested in full at $1.61 per share, and the remaining 56,000 optionsvested based upon meeting certain performance criteria.  The non-vested options were exercisable at aweighted average exercise price of $4.67 per share.  The vested andunvested options expired in November 2002.  In September of 2003, the company entered into a newagreement with this firm that granted 62,500 options that vested in full at$2.00 per share.  The Company recorded$22,000 to stock based compensationexpense in 2001 and $69,513 to stock basedcompensation expense in 2003, related to these options.

 

In October of 2003, the Company recorded$4,976 of stock based compensationexpense related to 6,000 options granted to a marketing consultant pursuant toa February 29, 2003 agreement.  InOctober of 2003, the Company also recorded $5,709 of stock based expenserelated to 3,000 and 250 options granted to a sales consultant pursuant toJuly 2002 and a November 2002 agreement, respectively.

 

In October of 2003, the Company alsorecorded $1.2 million of stock based compensation expense for the release ofrepurchase restrictions on employee owned shares (“Contingent Shares”) thatwere issued to the former stockholders of Mokume Software, Inc. (“Mokume”) andwere subject to repurchase by the Company if Versant’s real-time computingbusiness did not achieve certain operating results within a defined time period(the “Earn-out Contingency”) and in some cases, subject to repurchase to othermonthly vesting restrictions.  The releaseof these repurchase restrictions was effected pursuant to an AmendmentAgreement dated September 26, 2003, between the Company and certain of theformer stockholders of Mokume (“Mokume Stockholders”), which amended theAgreement and Plan of Reorganization dated as of November 19, 2002 pursuantto which Versant acquired Mokume (the “Mokume Merger Agreement”).  See note 9.

 

**8.****                        IncomeTaxes**

 

The Company accounts for income taxespursuant to the provisions of SFAS No. 109, “Accounting for Income Taxes,”which requires an asset and liability approach to accounting for income taxes.Deferred tax liabilities and assets are determined based on the differencebetween the financial statement carrying amounts and the tax basis of assetsand liabilities and are measured using the enacted statutory tax rates ineffect at the balance sheet date. The Company records a valuation allowance toreduce its deferred tax assets when uncertainty regarding that realizabilityexists.

 

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

 
|           |   | **Year Ended  October 31,  2003** |   | **Year Ended  October 31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   |
|----------------|--------|----------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------|--------|
| United  States |   | $                                      | (3,800 | )                                      | $      | (4,266                                        | )      | $ | (6,039 | ) |
| International  |   | 1,485                                  |   | 944                                    |   | (1,026                                        | )      |
|           |   | $                                      | (2,315 | )                                      | $      | (3,322                                        | )      | $ | (7,065 | ) |

 

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

 
|                              |   | **Year Ended  October  31,  2003** |   | **Year Ended  October  31,  2002** |   | **Ten Months  Ended  October 31,  2001** |   |
|-----------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------------|--------|
| Current:                          |   |                                    |   |                                    |   |                                          |   |
| Federal                           |   | $                                       | — |                                    | $      | —                                        |   | $ | — |   |
| State                             |   | —                                  |   | —                                  |   | —                                        |   |
| Foreign  withholding              |   | 74                                      |   | 68                                      |   | 93                                            |   |
| Total  current                    |   | 74                                      |   | 68                                      |   | 93                                            |   |
| Deferred:                         |   |                                    |   |                                    |   |                                          |   |
| Federal                           |   | —                                  |   | —                                  |   | —                                        |   |
| State                             |   | —                                  |   | —                                  |   | —                                        |   |
| Total  deferred                   |   | —                                  |   | —                                  |   | —                                        |   |
| Total  provision for income taxes |   | $                                       | 74     |                                    | $      | 68                                            |   | $ | 93 |   |

 

55

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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,  2003** |       | **Year Ended  October  31,  2002** |       | **Ten Months  Ended  October 31,  2001** |       |
|-----------------------------------------------------------------|--------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------|------------|
|                                                            |   |                                    | ** ** |                                    | ** ** |                                          | ** ** |
| Federal tax  (benefit) at statutory rate                        |   | $                                       | (810       | )                                       | $          | (1,162                                        | )          | $ | (2,473 | ) |
| State tax  (benefit) at statutory rate, net of  federal benefit |   | (142                                    | )          | (115                                    | )          | (223                                          | )          |
| Change in  valuation allowance                                  |   | 790                                     |       | 1,000                                   |       | 2,682                                         |       |
| Foreign tax  differential                                       |   | 17                                      |       | 268                                     |       | 7                                             |       |
| Other                                                           |   | 219                                     |       | 77                                      |       | 100                                           |       |
| Provision  for income taxes                                     |   | $                                       | 74         |                                    | $          | 68                                            |       | $ | 93 |   |
|                                                            |   |                                    |       |                                    |       |                                          |       |
| Effective  tax rate                                             |   | —                                  |       | —                                  |       | —                                        |       |

 

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

 
|                              |   | **October 31,  2003** |       | **October 31,  2002** |       | **October 31,  2001** |       |
|-----------------------------------|--------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
|                              |   |                       | ** ** |                       | ** ** |                       | ** ** |
| Deferred tax  asset:              |   |                       |       |                       |       |                       |       |
| Net  operating loss carryforwards |   | $                          | 16,582     |                       | $          | 15,808                     |       | $ | 15,247 |   |
| Tax credit  carryforwards         |   | 3,302                      |       | 3,071                      |       | 2,959                      |       |
| Other                             |   | 617                        |       | 832                        |       | 650                        |       |
|                              |   | 20,501                     |       | 19,711                     |       | 18,856                     |       |
| Valuation  allowance              |   | (20,501                    | )          | (19,711                    | )          | (18,856                    | )          |
| Net deferred  tax asset           |   | $                          | —     |                       | $          | —                     |       | $ | — |   |

 

At October 31, 2003, the Company hadfederal and state net operating loss carryforwards of  $45.5 million and $11.3 million, respectively and tax creditcarryforwards of $3.3 million expiring on various dates through 2023.  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 $20.5 million has been recorded against the Company’s netdeferred tax assets of approximately $20.5 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 ofthe Internal Revenue Code of 1986, the availability of net operating loss andtax carryforwards to offset federal taxable income in future periods is subjectto an annual limitation.

 

**9.****                        Acquisitions**

 

MokumeSoftware, Inc.

 

On November 19, 2002, the Companyacquired 100% of the outstanding common stock of Mokume Software, Inc.(“Mokume”).  Mokume developed, real-timecomputing software solutions and related services for customers in themanufacturing industry to improve their business processes and logistics.Mokume became part of our Real-Time Solutions business unit which is currentlydeveloping software products and technologies for building real-time computingsoftware applications that link real-time data sources to an enterprise’scentral software databases. Real-time computing solutions enable an enterpriseto obtain information in real time from different parts of its operations inorder to make better decisions based on up-to-the-minute information. To date,the Company has offered real-time consulting services and one real-timeproduct, Versant Real-Time Framework (VRTF). The Company expects that its object database technology will bean integral part of the Company’s real-time solution offerings.

 

A total of 2.4 million shares of common stockwere issued for our acquisition of Mokume in November 2002, 1.2 millionshares of which (the “Contingent Shares”) were subject to repurchase by theCompany unless certain operational targets

 

56

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relating to the acquired business were achieved (the “Earn-outContingency”) or, in some cases, if certain vesting conditions were notsatisfied. The initial aggregate purchase price for the acquisition of Mokumewas $843,417, which included the issuance of 1.2 million shares of common stockof the Company, valued at $630,240, and $213,177 in acquisition relatedcosts.  In the three months endedJuly 31, 2003 we recorded $53,400 in additional acquisition related costs.  The value of the common shares issued wasdetermined based on the market price of the Company’s common shares of $0.52 onNovember 19, 2002, the acquisition date. On September 26, 2003, theCompany entered into an Amendment Agreement, which amended the original mergeragreement with Mokume of November 19, 2002 (“Mokume Merger Agreement”), asfollows:

 

1. A total of 363,600 of the ContingentShares were forfeited by the former Mokume stockholders and cancelled withoutconsideration, and the remaining 848,400 Contingent Shares are no longersubject to forfeiture or repurchase by Versant and were released from theEarn-Out Contingency and any vesting restrictions that were applicable to them.

 

2. Subject to certain conditions, the2,060,400 shares issued under the Mokume Merger Agreement that remainedoutstanding are to be released from the risk of forfeiture to satisfy claimsfor indemnification made by Versant under the Mokume Merger Agreement ininstallments over time as follows:

 

•                  606,400shares were released from potential forfeiture under indemnification claims onSeptember 26, 2003.

 

•                  Thebalance of 1,454,000 shares are to be released in various increments at varioustimes during the one-year period beginning on November 19, 2003 and endingNovember 19, 2004, when all shares not previously forfeited would bereleased from indemnification claims.

 

3. The Amendment Agreement also provides theformer Mokume stockholders certain rights to satisfy Versant indemnificationclaims in cash in lieu of shares of the Company’s stock issued under the MokumeMerger Agreement.

 

The accelerated vesting of shares owned bynon-employees was recorded as additional goodwill in the amount of$290,000.  As of October 31, 2003the Mokume goodwill balance is $706,817. In accordance with SFAS 142, thegoodwill will not be amortized but will be reviewed for impairment on an annualbasis. The Company anticipates that any additional contingent considerationwill be allocated to goodwill.  Theconsolidated statement of operations for the year ended October 31, 2003includes the results of operations relating to Mokume’s business activitysubsequent to the date of acquisition. If the results of the two companies were combined on a pro forma basisfor the year ended October 31, 2003, the difference between pro formaresults and actual results reported herein would be immaterial.

 

The following table summarizes the purchaseprice allocation:

 

| Purchased technology   |   | $       | 480,000   |   |
|------------------------|--------|---------|-----------|--------|
| Goodwill               |   | 706,817 |      |
| Total assets  acquired |   | $       | 1,186,817 |   |

 

The Company obtained an independentappraiser’s valuation to determine the amounts allocated to purchasedtechnology and goodwill. The valuation analysis utilized the income approachand utilized the relief from royalty and cost approaches as reasonablenesschecks.  Based on this valuation, $480,000was allocated to purchased technology, which represented the fair market valueof the technology for each of the existing products, as of the date of theacquisition. The purchased technology was assigned a useful life of five yearsand will be amortized to cost of goods sold. Amortization of purchased technology related to the acquisition ofMokume was $91,000 for the twelve months ended October 31, 2003.

 

SoftMountain

 

On September 15, 1998, the Companyacquired 100% of the outstanding equity of Soft Mountain S.A. (“SoftMountain”), a French company, in return for approximately $136,000 in cash and245,586 shares of the Company’s common stock, valued at $2.625 per share.  Theacquisition of Soft Mountain was accounted for using the purchase method ofaccounting and resulted in the Company recording goodwill of $1.2 million.  In November 1999, the Company issued anadditional 30,000 shares of common stock to the original shareholders of SoftMountain in connection with the acquisition. This additional cost was added to the original goodwill amount. TheCompany wrote off the remaining balance of goodwill in the amount of $555,000during 2001, due to an impairment in the carrying value of the asset and theclosure of the French office.

 

57

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**11.****                 Warrants**

 

In connection with the issuance of Series AConvertible Preferred Stock in fiscal 1999, the Company issued warrants topurchase 1,489,799 shares of the Company’s common stock for cash considerationof $73,357. In September 2000 warrants to purchase 158,450 shares ofcommon stock were exercised for a total of $338,000.  The warrants have an exercise price of $2.13 per share, wereimmediately exercisable and expire upon the earlier 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 saleof all or substantially all of the Company’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, 2003, warrants topurchase 1,331,349 shares of common stock are still outstanding.

 

Each investor also agreed not topurchase 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.  SeeNote 12 to these notes to consolidated financial statements.

 

**12.****                 SubsequentEvents**

 

On September 27, 2003, we signed anAgreement and Plan of Merger with Poet Holdings, Inc., a Delaware corporation(“Poet”), and Puma Acquisition, Inc., a wholly owned subsidiary of Versant(“Merger Sub”).  Subject to the terms ofthis agreement, Poet will  become awholly-owned subsidiary of Versant. Upon consummation of the Merger, each outstanding share of Poet commonstock will be exchanged for 1.4 shares of Versant common stock, and options andwarrants to purchase Poet common stock will be exchanged for options topurchase shares of Versant common stock according to the same exchangeratio.  Poet is a publicly helddeveloper of object database management and e-commerce software, whose stock istraded on the Frankfurt Stock Exchange. The proposed merger is intended to qualify as a tax-freereorganization.  The Merger Agreementcalls for Versant to reduce the size of its Board of Directors to five directorsupon effectiveness of the merger, with the board of directors immediately afterconsummation of the Merger to be composed of two directors from Poet and threedirectors (including Versant’s CEO, Nick Ordon) from Versant.  If the Merger Agreement is terminatedwithout consummation of the merger in certain circumstances, a party to theMerger Agreement would become obligated to pay the other party certaintermination fees as described in the Merger Agreement ranging from $500,000 to$1,000,000.

 

In connection with the execution of theMerger Agreement, Versant and Vertex Technology Fund, Ltd., Vertex TechnologyFund (II), Ltd. and the Joseph M. Cohen Family Limited Partnership(collectively, the “Preferred Shareholders”) have entered into a PreferredStock Conversion Agreement (the “Conversion Agreement”) pursuant to which the PreferredShareholders have agreed to vote for certain actions that would cause their1,313,743 outstanding shares of Versant Series A Preferred Stock to beconverted into shares of Versant common stock effective upon consummation ofthe proposed Merger with Poet. The conversion of the Preferred Shareholders’shares of Series A Preferred Stock would occur at an increased conversion ratethat would result in each such share of Series A Preferred Stock beingconverted into three shares of Versant common stock.  Currently, each outstanding share of Versant’s Series A PreferredStock is convertible into two shares of common stock.  In addition, in exchange for this agreement to convert, effectiveupon such conversion, warrants to purchase a total of 1,331,349 shares ofVersant common stock held by the Preferred Shareholders would be amended toreduce the exercise price of such warrants from $2.13 to $1.66 per share ofcommon stock and to extend the term of such warrants by one year.

 

**Item 9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

Effective June 23, 2003, we elected to change our certifyingaccountant as follows:

 
| (i)    |   | We dismissed KPMG LLP as our independent  accountants.                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (ii)   |   | The report of KPMG LLP on our consolidated  financial statements for the fiscal year ended October 31, 2002 did not  contain an adverse opinion or disclaimer of opinion and was not qualified or  modified as to uncertainty, audit scope, or accounting principles.  KPMG LLP has only reported on the  corporation’s consolidated financial statements for the fiscal year ended  October 31, 2002. |

 

58

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| (iii)  |   | The decision to dismiss KPMG as our  independent accountants was approved by the audit committee of our board of  directors on June 23, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (iv)   |   | In connection with the audit of our  financial statements for the fiscal year ended October 31, 2002 and the  subsequent interim periods, preceding the dismissal, we had no disagreements  with KPMG 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 KPMG, would have caused them to make  reference to the subject matter of the disagreements in connection with its  report.  We requested KPMG to furnish  a letter addressed to the Securities and Exchange  Commission as to whether it agrees with the above statements.  A copy of that letter, dated June 24,  2003, is filed as Exhibit 16 to our report on Form 8-K filed with the  Securities and Exchange Commission on June 25, 2003. |

 

Effective June 24, 2003, we engaged Grant Thornton LLP as our newindependent auditors. The decision to engage Grant Thornton LLP was approved byour Audit Committee on June 23, 2003. 

 

59

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**SCHEDULE II - VALUATION AND QUALIFYINGACCOUNTS AND RESERVES**

 
|                                    |   | **Balance at  Beginning of Period** |       | **Additions  Charged to  Income** |       | **Deductions** |       | **Balance at  End of Period** |       |
|-----------------------------------------|--------|-------------------------------------|------------|-----------------------------------|------------|----------------|------------|-------------------------------|------------|
|                                    |   | **(in thousands)**                  | ** ** |
| **Allowance for doubtful accounts:**    |   |                                | ** ** |                              | ** ** |           | ** ** |                          | ** ** |
| Ten months  ended October 31, 2001 |   | $                                   | 551        |                              | 302        |           | 371        |                          | $          | 482 |   |
| Year ended  October 31, 2002       |   | $                                   | 482        |                              | 296        |           | 91         |                          | $          | 687 |   |
| Year ended  October 31, 2003       |   | $                                   | 687        |                              | 139        |           | 568        |                          | $          | 258 |   |

 

**Item 9A.  Controls and Procedures.**

 

(a)          Evaluation of Disclosure Controls andProcedures.  The Securities andExchange Commission defines the term “disclosure controls and procedures” tomean a company’s controls and other procedures that are designed to ensure thatinformation required to be disclosed in the reports that it files or submitsunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  Based onthe evaluation of the effectiveness of our disclosure controls and proceduresby our management, with the participation of our chief executive officer andour chief financial officer, as of the end of the period covered by thisreport, our chief executive officer and our chief financial officer haveconcluded that our disclosure controls and procedures were effective to ensurethat information required to be disclosed in the reports that the Company filesor submits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported, within the time periods specified in the Commission’srules and forms.

 

(b)         Changes in Internal Control Over FinancialReporting. No change in the Company’s internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)occurred during the fiscal quarter ended October 31, 2003 that hasmaterially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

60

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##### **PART III**

##### ** **

**Item 10. Directorsand Executive Officers of the Registrant**

 

The information about directors required forthis Item is incorporated by reference from our Proxy Statement to be filed forour 2004 Annual Meeting of Shareholders. Information about executive officersthat is required for this Item can be found in Item 4A of this report.

 

**Item 11.  Executive Compensation**

 

The information required for this Item isincorporated by reference from our Proxy Statement to be filed for our  2004 Annual Meeting of Shareholders.

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Shareholder Matters**

 

Except as provided below under this Item 12,the information required for this Item is incorporated by reference from ourProxy Statement to be filed for our 2004 Annual Meeting of Shareholders.

 

***SecuritiesAuthorized for Issuance Under Equity Compensation Plans***

 

The following information is provided withrespect to our equity compensation plans (including  individual compensation arrangements) as of October 31,2003:

 
| **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**     |   | 4,074,810                                                                                           |   | 2.66                                                                                |   | 1,637,385                                                                                                                                              |   |
| **Equity Compensation plans not approved by  security holders** |   | —                                                                                              |   |                                                                                |   | —                                                                                                                                                 |   |
| **Total:**                                                      |   | 4,074,810                                                                                           |   | 2.66                                                                                |   | 1,637,835                                                                                                                                              |   |

 

**Item 13.  Certain Relationships and RelatedTransactions.**

 

The information required for this Item isincorporated by reference from our Proxy Statement to be filed for our 2004Annual Meeting of Stockholders.

 

**Item 14.  Principal Accountant Fees and Services**

 

The information required for this Item isincorporated by reference from our Proxy Statement to be filed for our 2004Annual Meeting of Shareholders.

 

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

 

**(a)**          1.               The following financial statements arefiled 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                 |

 

61

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| Notes to Consolidated Financial Statements |
|--------------------------------------------|

 

2.               The followingfinancial statement schedule is filed at the end of Item 8 of this reporton Form 10-K:

 
| Schedule II - Valuation and Qualifying  Accounts and Reserves |
|--------------------------------------------------------------------|

 

3.               The followingexhibits are filed herewith or incorporated by reference and are also listed inthe “Exhibit Index” below.

 

**EXHIBIT INDEX**

 
|                |   |                                                                                                                                                                                        |   | **Incorporated by Reference** |   | **Filed  Herewith** |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|---------------------|
| **Exhibit  Number** |   | **Exhibit Description**                                                                                                                                                                     |   | **Form**                      |   | **Date**            |   | **Number** |   |
| 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 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 2.02                |   | Agreement and Plan of Merger with Poet  Holdings, Inc. dated September 27, 2003 by and among the Registrant,  Puma Acquisition Inc. and Poet Holdings Inc.                             |   | 8-K                           |   | 09/29/03            |   | 99.01 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 2.03                |   | Amendment Agreement. dated  September 26, 2003 by and among the Registrant and former stockholders  of Mokume Software, Inc.                                                           |   | 8-K                           |   | 10/03/03            |   | 99.01 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 3.01                |   | 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 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 3.02                |   | 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 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 3.03                |   | Registrant’s Certificate of Determination  filed with the California Secretary of State on July 13, 1999                                                                          |   | 8-K                           |   | 07/12/99            |   | 3.01 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 3.04                |   | Certificate of Amendment of Registrant’s  Amended and Restated Articles of Incorporation, filed with the California  Secretary of State on August 5, 2003.                        |   | S-4                           |   | 11/13/03            |   | 3.4 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 3.05                |   | Registrant’s Amended and Restated Bylaws                                                                                                                                               |   | SB-2                          |   | 07/17/96            |   | 3.05 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 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               |   | Form of Indemnity Agreement entered into by  Registrant with each of its directors and executive officers                                                                                   |   | SB-2                          |   | 07/17/96            |   | 10.10 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 10.05               |   | Form of Amendment to Versant Corporation  Stock Option Agreement**                                                                                                                          |   | SB-2                          |   | 07/17/96            |   | 10.14 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 10.06               |   | Lease Agreement dated November 25,  1996 between John Arrillaga,                                                                                                                       |   | 10-KSB                        |   | 04/03/98            |   | 10.15 |   |   |

 

62

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|   |   | Trustee et al. and Registrant                                                                                                                                                                                                |   |   |   |     |   |   |   |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------|--------|--------|--------|--------|
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.07  |   | Form of Letter Agreement dated  October 22, 1997 between Registrant and its executive officers**                                                                                                                        |   | 10-KSB |   | 03/31/97 |   | 10.16  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.08  |   | Letter Agreement dated November 26,  1997 between Registrant and Nick Ordon**                                                                                                                                           |   | 10-KSB |   | 03/31/97 |   | 10.18  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.09  |   | Registration Rights Agreement dated  October 16, 1998 between the Registrant and Vertex Technology Fund Pte.  Ltd.                                                                                                      |   | 10-KSB |   | 03/31/99 |   | 10.31  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.11  |   | 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  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.12  |   | Special Situations Fund Stock Warrant dated  December 28, 1998                                                                                                                                                          |   | 10-KSB |   | 03/31/99 |   | 10.34  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.13  |   | 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  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.14  |   | 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  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.15  |   | Form of Registrant’s Common Stock Purchase  Warrant                                                                                                                                                                     |   | 8-K    |   | 07/12/99 |   | 10.02  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.16  |   | 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  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.17  |   | Registrant’s 1996 Equity Incentive Plan,  amended as of April 18, 2002**                                                                                                                                           |   | S-8    |   | 05/09/02 |   | 4.06   |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.18  |   | Loan and Security Agreement dated  April 18, 2002 by and between the Registrant and Pacific Capital Funding                                                                                                             |   | 10-Q   |   | 06/14/02 |   | 10.53  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.19  |   | Amendment to the Loan and Security  Agreement by and between the Registrant and Pacific Capital Funding dated  April 11, 2003                                                                                           |   | 10-K   |   |     |   |   |   | X      |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.20  |   | Amendment to the Loan and Security  Agreement by and between the Registrant and Pacific Capital Funding dated  June 5, 2003                                                                                             |   | 10-K   |   |     |   |   |   | X      |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.21  |   | Employment Offer Letter Agreement dated as  of November 19, 2002 by and between the Registrant and Ajay Jain**                                                                                                          |   | 10-K   |   | 1/27/03  |   | 10.28  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.22  |   | Non-Competition Agreement dated as of  November 19, 2002 by and among the Registrant, Ajay Jain and Mokume  Software, Inc.**                                                                                            |   | 10-K   |   | 1/27/03  |   | 10.29  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.23  |   | Preferred Stock Conversion Agreement dated  as of September 26, 2003 by and amount the Registrant, Vertex Technology  Fund, Ltd., Vertex Technology Fund (II), Ltd. and the Joseph M. Cohen Family  Limited Partnership |   | 8-K    |   | 09/29/03 |   | 99.02  |   |   |

 

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| 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     |   |   |
|   |   |                                                                                                                 |   |   |   |    |   |   |   |   |
| 16.03  |   | Letter dated June 24, 2003 from KPMG  LLP regarding change in Registrant’s certifying accountant           |   | 8-K    |   | 6/25/03 |   | 16     |   |   |
|   |   |                                                                                                                 |   |   |   |    |   |   |   |   |
| 21.01  |   | Subsidiaries of the Registrant                                                                                       |   |   |   |    |   |   |   | X      |
|   |   |                                                                                                                 |   |   |   |    |   |   |   |   |
| 23.01  |   | Consent of Grant Thornton LLP                                                                                        |   |   |   |    |   |   |   | X      |
|   |   |                                                                                                                 |   |   |   |    |   |   |   |   |
| 23.02  |   | Consent of KPMG LLP                                                                                                  |   |   |   |    |   |   |   | X      |
|   |   |                                                                                                                 |   |   |   |    |   |   |   |   |
| 23.03  |   | Note regarding absence of Consent of Arthur  Andersen LLP                                                            |   | 10-K   |   | 1/29/03 |   | 23.02  |   |   |
|   |   |                                                                                                                 |   |   |   |    |   |   |   |   |
| 31.01  |   | Certification of Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.            |   | X      |
|   |   |                                                                                                                 |   |   |   |    |   |   |   |   |
| 31.02  |   | Certification of Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.            |   | X      |
|   |   |                                                                                                                 |   |   |   |    |   |   |   |   |
| 32.01  |   | Certification of Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.            |   | X      |
|   |   |                                                                                                                 |   |   |   |    |   |   |   |   |
| 32.02  |   | Certification of Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.            |   | X      |

 

----

| *      |   | Confidential  treatment has been granted with respect to certain portions of this  agreement. Such portions have been omitted from the filing and have been  filed separately with the Securities and Exchange Commission. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                       |
| **     |   | Management  contract or compensatory plan.                                                                                                                                                                                 |

 

**(b)****          Reportson Form 8-K.**

 

On August 5, 2003, we furnished a reporton Form 8-K regarding new guidance regarding anticipated financial results forour third fiscal quarter ending July 31, 2003.

 

On September 9, 2003, we furnished areport on Form 8-K regarding our financial results for our third fiscal quarterended July 31, 2003.  The reportincluded an unaudited consolidated balance sheet at July 31, 2003, a consolidatedbalance sheet at October 31, 2002 derived from audited financialinformation and unaudited consolidated statements of operation for the threeand nine-month periods ended July 31, 2003 and 2002.

 

On September 29, 2003. we filed a reporton Form 8-K regarding our entering into an Agreement and Plan of Merger withPoet Holdings, Inc. and our entering into a Preferred Stock ConversionAgreement with holders of our Series A preferred stock.

 

On October 3, 2003, we filed a report onForm 8-K regarding our Amendment Agreement with former stockholders of MokumeSoftware Inc.

 

On November 24, 2003, we furnished areport on Form 8-K regarding our financial results for the quarter and yearended October 31, 2003.  The reportincluded an unaudited consolidated balance sheet at October 31, 2003, aconsolidated balance sheet at October 31, 2002 derived from auditedfinancial information and unaudited consolidated statements of operation forthe three and twelve-month periods ended October 31, 2003 and 2002 as wellas a reconciliation to certain pro forma financial meaures.

 

64

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**(c)**          The exhibits filedherewith or incorporated by reference are listed in the “Exhibit Index” below**.**

 

**(d)**          See Item 15(a)(2) above.

 

65

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | VERSANT CORPORATION                        |
|--------|--------------------------------------------|
|   |                                       |
|   |                                       |
|   | By:                                        | /s/ Lee McGrath |   |
|   | Lee McGrath                                |
|   | Vice President, Finance and Administration |
|   |                                       |
|   | Date:   January 14, 2004         |

 

66

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**POWER OF ATTORNEY**

 

By signing this Form 10-K below, I herebyappoint each of Nick Ordon and Lee McGrath as my attorneys-in-fact to sign allamendments to this Form 10-K on my behalf, and to file this Form 10-K(including all exhibits and other documents related to the Form 10-K) with theSecurities and Exchange Commission.  Iauthorize each of my attorneys-in-fact to (1) appoint a substituteattorney-in-fact for himself and (2) perform any actions that he believes arenecessary or appropriate to carry out the intention and purpose of this Powerof Attorney.  I ratify and confirm alllawful actions taken, directly or indirectly, by my attorneys-in-fact and byany properly appointed substitute attorneys-in-fact.

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

 
| **Name**                                                      |   | **Title**             |                   | **Date** |
|---------------------------------------------------------------|--------|-----------------------|------------------------|----------|
|                                                          |   |                  |                   |     |
| PRINCIPAL EXECUTIVE OFFICER:                                  |   |                  |                   |     |
|                                                          |   |                  |                   |     |
| /s/ Nick Ordon                                                |   |                  | President, Chief       |     | January 14, 2004 |
| Nick Ordon                                                    |   | Executive Officer and |                   |     |
|                                                          |   | Director              |                   |     |
|                                                          |   |                  |                   |     |
| PRINCIPAL FINANCIAL OFFICER AND  PRINCIPAL ACCOUNTING OFFICER |   |                  |                   |     |
|                                                          |   |                  |                   |     |
| /s/ Lee McGrath                                               |   |                  | Vice President-Finance |     | January 14, 2004 |
| Lee McGrath                                                   |   | and Administration    |                   |     |
|                                                          |   |                  |                   |     |
| ADDITIONAL DIRECTORS:                                         |   |                  |                   |     |
|                                                          |   |                  |                   |     |
| /s/ Uday Bellary                                              |   |                  | Director               |     | January 14, 2004 |
| Uday Bellary                                                  |   |                  |                   |     |
|                                                          |   |                  |                   |     |
| /s/ William Henry Delevati                                    |   |                  | Director               |     | January 14, 2004 |
| William Henry Delevati                                        |   |                  |                   |     |
|                                                          |   |                  |                   |     |
| /s/ Ajay Jain                                                 |   |                  | Director               |     | January 14, 2004 |
| Ajay Jain                                                     |   |                  |                   |     |
|                                                          |   |                  |                   |     |
| /s/ Satesh Lele                                               |   |                  | Director               |     | January 14, 2004 |
| Satesh Lele                                                   |   |                  |                   |     |
|                                                          |   |                  |                   |     |
| /s/ Shyam Rangole                                             |   |                  | Director               |     | January 14, 2004 |
| Shyam Rangole                                                 |   |                  |                   |     |
|                                                          |   |                  |                   |     |
| /s/ Daniel L. Roberts                                         |   |                  | Director               |     | January 14, 2004 |
| Daniel Roberts                                                |   |                  |                   |     |
|                                                          |   |                  |                   |     |
| /s/ Bernhard Woebker                                          |   |                  | Director               |     | January 14, 2004 |
| Bernhard Woebker                                              |   |                  |                   |     |

 

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**EXHIBIT INDEX**

 
|                |   |                                                                                                                                                                                        |   | **Incorporated by Reference** |   | **Filed  Herewith** |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|---------------------|
| **Exhibit  Number** |   | **Exhibit Description**                                                                                                                                                                     |   | **Form**                      |   | **Date**            |   | **Number** |   |
| 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 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 2.02                |   | Agreement and Plan of Merger with Poet  Holdings, Inc. dated September 27, 2003 by and among the Registrant,  Puma Acquisition Inc. and Poet Holdings Inc.                             |   | 8-K                           |   | 09/29/03            |   | 99.01 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 2.03                |   | Amendment Agreement. dated  September 26, 2003 by and among the Registrant and former stockholders  of Mokume Software, Inc.                                                           |   | 8-K                           |   | 10/03/03            |   | 99.01 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 3.01                |   | 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 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 3.02                |   | 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 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 3.03                |   | Registrant’s Certificate of Determination  filed with the California Secretary of State on July 13, 1999                                                                          |   | 8-K                           |   | 07/12/99            |   | 3.01 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 3.04                |   | Certificate of Amendment of Registrant’s  Amended and Restated Articles of Incorporation, filed with the California  Secretary of State on August 5, 2003.                        |   | S-4                           |   | 11/13/03            |   | 3.4 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 3.05                |   | Registrant’s Amended and Restated Bylaws                                                                                                                                               |   | SB-2                          |   | 07/17/96            |   | 3.05 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 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               |   | Form of Indemnity Agreement entered into by  Registrant with each of its directors and executive officers                                                                                   |   | SB-2                          |   | 07/17/96            |   | 10.10 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 10.05               |   | Form of Amendment to Versant Corporation  Stock Option Agreement**                                                                                                                          |   | SB-2                          |   | 07/17/96            |   | 10.14 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 10.06               |   | Lease Agreement dated November 25,  1996 between John Arrillaga, Trustee et al. and Registrant                                                                                         |   | 10-KSB                        |   | 04/03/98            |   | 10.15 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 10.07               |   | Form of Letter Agreement dated  October 22, 1997 between Registrant and its executive officers**                                                                                       |   | 10-KSB                        |   | 03/31/97            |   | 10.16 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 10.08               |   | Letter Agreement dated November 26,  1997 between Registrant and Nick Ordon**                                                                                                          |   | 10-KSB                        |   | 03/31/97            |   | 10.18 |   |   |
|                |   |                                                                                                                                                                                        |   |                          |   |                |   |   |   |   |
| 10.09               |   | Registration Rights Agreement dated  October 16, 1998 between the Registrant and Vertex Technology Fund Pte.  Ltd.                                                                     |   | 10-KSB                        |   | 03/31/99            |   | 10.31 |   |   |

 

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| 10.11  |   | 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  |   |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------|--------|--------|--------|--------|
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.12  |   | Special Situations Fund Stock Warrant dated  December 28, 1998                                                                                                                                                          |   | 10-KSB |   | 03/31/99 |   | 10.34  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.13  |   | 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  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.14  |   | 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  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.15  |   | Form of Registrant’s Common Stock Purchase  Warrant                                                                                                                                                                     |   | 8-K    |   | 07/12/99 |   | 10.02  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.16  |   | 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  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.17  |   | Registrant’s 1996 Equity Incentive Plan,  amended as of April 18, 2002**                                                                                                                                           |   | S-8    |   | 05/09/02 |   | 4.06   |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.18  |   | Loan and Security Agreement dated  April 18, 2002 by and between the Registrant and Pacific Capital Funding                                                                                                             |   | 10-Q   |   | 06/14/02 |   | 10.53  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.19  |   | Amendment to the Loan and Security  Agreement by and between the Registrant and Pacific Capital Funding dated  April 11, 2003                                                                                           |   | 10-K   |   |     |   |   |   | X      |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.20  |   | Amendment to the Loan and Security  Agreement by and between the Registrant and Pacific Capital Funding dated  June 5, 2003                                                                                             |   | 10-K   |   |     |   |   |   | X      |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.21  |   | Employment Offer Letter Agreement dated as  of November 19, 2002 by and between the Registrant and Ajay Jain**                                                                                                          |   | 10-K   |   | 1/27/03  |   | 10.28  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.22  |   | Non-Competition Agreement dated as of  November 19, 2002 by and among the Registrant, Ajay Jain and Mokume  Software, Inc.**                                                                                            |   | 10-K   |   | 1/27/03  |   | 10.29  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 10.23  |   | Preferred Stock Conversion Agreement dated  as of September 26, 2003 by and amount the Registrant, Vertex Technology  Fund, Ltd., Vertex Technology Fund (II), Ltd. and the Joseph M. Cohen Family  Limited Partnership |   | 8-K    |   | 09/29/03 |   | 99.02  |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 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     |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 16.03  |   | Letter dated June 24, 2003 from KPMG  LLP regarding change in Registrant’s certifying accountant                                                                                                                   |   | 8-K    |   | 6/25/03  |   | 16     |   |   |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 21.01  |   | Subsidiaries of the Registrant                                                                                                                                                                                               |   |   |   |     |   |   |   | X      |
|   |   |                                                                                                                                                                                                                         |   |   |   |     |   |   |   |   |
| 23.01  |   | Consent of Grant Thornton LLP                                                                                                                                                                                                |   |   |   |     |   |   |   | X      |

 

69

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| 23.02  |   | Consent of KPMG LLP                                                                                             |   |   |   |    |   |   |   | X      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------|--------|--------|--------|--------|
|   |   |                                                                                                            |   |   |   |    |   |   |   |   |
| 23.03  |   | Note regarding absence of Consent of Arthur  Andersen LLP                                                       |   | 10-K   |   | 1/29/03 |   | 23.02  |   |   |
|   |   |                                                                                                            |   |   |   |    |   |   |   |   |
| 31.01  |   | Certification of Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.       |   | X      |
|   |   |                                                                                                            |   |   |   |    |   |   |   |   |
| 31.02  |   | Certification of Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.       |   | X      |
|   |   |                                                                                                            |   |   |   |    |   |   |   |   |
| 32.01  |   | Certification of Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.       |   | X      |
|   |   |                                                                                                            |   |   |   |    |   |   |   |   |
| 32.02  |   | Certification of  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |   | X      |

 

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| *      |   | Confidential  treatment has been granted with respect to certain portions of this  agreement. Such portions have been omitted from the filing and have been  filed separately with the Securities and Exchange Commission. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                       |
| **     |   | Management  contract or compensatory plan.                                                                                                                                                                                 |

 

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