United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2006
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 000-28540
VERSANT CORPORATION
(Exact name of Registrant as specified in its charter)
California |
| 94-3079392 |
(State or other jurisdiction |
| (I.R.S. Employer |
of incorporation or organization) |
| 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:
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
As of June 8, 2006, there were outstanding 3,577,594 shares of the Registrant’s common stock, no par value.
VERSANT CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended April 30, 2006
Table of Contents
2
VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
|
| April 30, |
| October 31, |
| ||
|
| 2006 |
| 2005 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 5,902 |
| $ | 3,958 |
|
Trade accounts receivable, net of allowance for doubtful accounts of $20 and $114 at April 30, 2006 and October 31, 2005, respectively |
| 1,410 |
| 2,529 |
| ||
Other current assets |
| 1,027 |
| 744 |
| ||
Total current assets |
| 8,339 |
| 7,231 |
| ||
|
|
|
|
|
| ||
Property and equipment, net |
| 407 |
| 489 |
| ||
Goodwill |
| 6,720 |
| 6,720 |
| ||
Intangible assets, net |
| 1,354 |
| 1,512 |
| ||
Other assets |
| 310 |
| 294 |
| ||
Total assets |
| $ | 17,130 |
| $ | 16,246 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 254 |
| $ | 779 |
|
Accrued liabilities |
| 2,159 |
| 2,667 |
| ||
Deferred revenues |
| 3,107 |
| 2,779 |
| ||
Deferred rent |
| 142 |
| 136 |
| ||
Total current liabilities |
| 5,662 |
| 6,361 |
| ||
|
|
|
|
|
| ||
Long term restructuring accrual |
| 112 |
| 448 |
| ||
Deferred revenues |
| 144 |
| 184 |
| ||
Deferred rent |
| 60 |
| 128 |
| ||
Variable interest entity liability |
| — |
| 137 |
| ||
Total liabilities |
| 5,978 |
| 7,258 |
| ||
|
|
|
|
|
| ||
Stockholders' equity: |
|
|
|
|
| ||
Common stock, no par value |
| 94,820 |
| 94,755 |
| ||
Deferred stock-based compensation |
| — |
| (44 | ) | ||
Other comprehensive income, net |
| 518 |
| 396 |
| ||
Accumulated deficit |
| (84,186 | ) | (86,119 | ) | ||
Total stockholders' equity |
| 11,152 |
| 8,988 |
| ||
Total liabilities and stockholders' equity |
| $ | 17,130 |
| $ | 16,246 |
|
See accompanying notes to condensed consolidated financial statements.
3
VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| April 30, |
| April 30, |
| April 30, |
| April 30, |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
License |
| $ | 1,745 |
| $ | 1,575 |
| $ | 4,258 |
| $ | 5,067 |
|
Maintenance |
| 1,457 |
| 1,543 |
| 3,090 |
| 3,135 |
| ||||
Professional services |
| 578 |
| 92 |
| 1,057 |
| 290 |
| ||||
Total revenues |
| 3,780 |
| 3,210 |
| 8,405 |
| 8,492 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cost of revenues: |
|
|
|
|
|
|
|
|
| ||||
License |
| 58 |
| 55 |
| 162 |
| 111 |
| ||||
Amortization of intangible assets |
| 79 |
| 200 |
| 158 |
| 395 |
| ||||
Maintenance |
| 345 |
| 360 |
| 729 |
| 778 |
| ||||
Professional services |
| 291 |
| 216 |
| 625 |
| 495 |
| ||||
Total cost of revenues |
| 773 |
| 831 |
| 1,674 |
| 1,779 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross profit |
| 3,007 |
| 2,379 |
| 6,731 |
| 6,713 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Sales and marketing |
| 765 |
| 1,630 |
| 1,711 |
| 3,350 |
| ||||
Research and development |
| 702 |
| 955 |
| 1,571 |
| 2,036 |
| ||||
General and administrative |
| 871 |
| 1,242 |
| 1,924 |
| 2,559 |
| ||||
Restructuring |
| 84 |
| (122 | ) | 218 |
| (122 | ) | ||||
Total operating expenses |
| 2,422 |
| 3,705 |
| 5,424 |
| 7,823 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) from operations |
| 585 |
| (1,326 | ) | 1,307 |
| (1,110 | ) | ||||
Outside shareholders' loss from VIE |
| — |
| — |
| 138 |
| — |
| ||||
Other income, net |
| 34 |
| 122 |
| 46 |
| 203 |
| ||||
Gain on disposal of Variable Interest Entity |
| 131 |
| — |
| 131 |
| — |
| ||||
Income (loss) from continuing operations before taxes |
| 750 |
| (1,204 | ) | 1,622 |
| (907 | ) | ||||
Net provision for income taxes |
| 99 |
| 22 |
| 182 |
| 67 |
| ||||
Net income (loss) from continuing operations |
| $ | 651 |
| $ | (1,226 | ) | $ | 1,440 |
| $ | (974 | ) |
Gain from sale of discontinued operations, net of income taxes | �� | 468 |
| — |
| 468 |
| — |
| ||||
Net income from discontinued operations, net of income taxes |
| 35 |
| 167 |
| 22 |
| 260 |
| ||||
Net income (loss) |
| $ | 1,154 |
| $ | (1,059 | ) | $ | 1,930 |
| $ | (714 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Basic income (loss) per share: |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) from continuing operations attributable to common shareholders |
| $ | 0.18 |
| $ | (0.35 | ) | $ | 0.40 |
| $ | (0.28 | ) |
Earnings from discontinued operations, net of income tax |
| $ | 0.14 |
| $ | 0.05 |
| $ | 0.14 |
| $ | 0.08 |
|
Net income (loss) attibutable to common shareholders |
| $ | 0.32 |
| $ | (0.30 | ) | $ | 0.54 |
| $ | (0.20 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Diluted income (loss) per share: |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) from continuing operations attributable to common shareholders |
| $ | 0.18 |
| $ | (0.35 | ) | $ | 0.40 |
| $ | (0.28 | ) |
Earnings from discontinued operations, net of income tax |
| $ | 0.14 |
| $ | 0.05 |
| $ | 0.14 |
| $ | 0.08 |
|
Net income (loss) attibutable to common shareholders |
| $ | 0.32 |
| $ | (0.30 | ) | $ | 0.54 |
| $ | (0.20 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Shares used in per share calculation: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| 3,569 |
| 3,514 |
| 3,564 |
| 3,496 |
| ||||
Diluted |
| 3,578 |
| 3,514 |
| 3,570 |
| 3,496 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Non-cash stock-based compensation included in the above expenses: |
|
|
|
|
|
|
|
|
| ||||
Cost of revenues |
| $ | 14 |
| $ | 6 |
| $ | 25 |
| $ | 8 |
|
Sales and marketing |
| 12 |
| 7 |
| 20 |
| 10 |
| ||||
Research and development |
| 20 |
| 5 |
| 37 |
| 9 |
| ||||
General and administrative |
| 18 |
| 6 |
| 39 |
| 23 |
| ||||
Total |
| $ | 64 |
| $ | 24 |
| $ | 121 |
| $ | 50 |
|
See accompanying notes to condensed consolidated financial statements.
4
VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
| Six Months Ended |
| ||||
|
| April 30, |
| ||||
|
| 2006 |
| 2005 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income (loss) |
| $ | 1,930 |
| $ | (714 | ) |
|
|
|
|
|
| ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
| ||
Gain from sale of discontinued operations, net of income taxes |
| (468 | ) | — |
| ||
Gain on disposal of Variable Interest Entity |
| (131 | ) | — |
| ||
Earnings from discontinued operations |
| (35 | ) | — |
| ||
Depreciation and amortization |
| 108 |
| 180 |
| ||
Amortization of intangible assets |
| 158 |
| 395 |
| ||
Stock-based compensation |
| 121 |
| 50 |
| ||
Write off of property and equipment |
| 25 |
| — |
| ||
Non-cash operating expenses related to cancellation of common stock |
| (50 | ) | — |
| ||
Recovery of bad debt allowance |
| (93 | ) | (177 | ) | ||
Changes in current assets and liabilities: |
|
|
|
|
| ||
Restricted cash |
| — |
| 20 |
| ||
Accounts receivable |
| 1,248 |
| 2,312 |
| ||
Prepaid expenses and other assets |
| (256 | ) | 309 |
| ||
Accounts payable |
| (485 | ) | (338 | ) | ||
Accrued liabilities and other liabilities |
| (794 | ) | (1,470 | ) | ||
Deferred revenues |
| 216 |
| 311 |
| ||
Deferred rent |
| (68 | ) | (41 | ) | ||
Net cash provided by operating activities |
| 1,426 |
| 837 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Proceed from sale of WebSphere |
| 500 |
| — |
| ||
Proceed from sale of Vanatec |
| 6 |
| — |
| ||
Purchases of property and equipment |
| (65 | ) | (5 | ) | ||
Net cash provided by (used in) investing activities |
| 441 |
| (5 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from sale of common stock, net |
| 38 |
| 304 |
| ||
Principal payments under capital lease obligations |
| (3 | ) | — |
| ||
Net payments under short-term note and bank loan |
| (39 | ) | — |
| ||
Net cash provided by (used in) financing activities |
| (4 | ) | 304 |
| ||
|
|
|
|
|
| ||
Effect of foreign exchange rate changes on cash and cash equivalents |
| 81 |
| (148 | ) | ||
Net increase in cash and cash equivalents |
| 1,944 |
| 988 |
| ||
Cash and cash equivalents at beginning of period |
| 3,958 |
| 3,313 |
| ||
Cash and cash equivalents at end of period |
| $ | 5,902 |
| $ | 4,301 |
|
See accompanying notes to condensed consolidated financial statements
5
VERSANT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. THE COMPANY AND BASIS OF PRESENTATION
Versant Corporation (with its subsidiaries, collectively referred to in this report as “Versant” or “the Company”) was incorporated in California in August 1988. Versant is a leading provider of object-oriented data management software that forms a critical component of the infrastructure of enterprise computing. The Company designs, develops, markets and supports object-oriented database management system products to solve complex data management and data integration problems of enterprises. Versant also provides related product support, training and consulting services to assist users in development and deployment of software applications based on its products. The Company operates its business within a single operating segment referred to as Data Management. Versant’s principal executive offices are located in Fremont, California. Versant has international operations in Germany, the United Kingdom and India and markets its software products and related maintenance services directly through telesales and field sales organizations in North America, Germany and the United Kingdom, and indirectly through distributors and resellers worldwide. Versant had a total of 85 employees at the end of the quarter ended April 30, 2006.
Versant is subject to the risks associated with similar companies in a comparable stage of development. These risks include, but are not limited to the following: fluctuations of operating results, seasonality, lengthy sales cycles for its products, product concentration, dependence on the continued customer acceptance of object database technology, competition, limited customer base, dependence on key individuals, dependence on international operations, foreign currency exchange rate fluctuations and the Company’s ability to adequately finance its ongoing operations.
Versant reported net income for the quarters ended January 31, 2006 and April 30, 2006, but it was not profitable in its fiscal year ended October 31, 2005. The Company operated at a net loss of $14.6 million in fiscal 2005, $12 million in fiscal 2004 and $2.4 million in fiscal 2003. Management anticipates funding future operations from its current cash resources and its future cash flows from operations. However, if the Company’s financial results fall short of projections, additional debt or equity may be required to finance operations, and the Company may need to implement further cost reductions. No assurances can be given that these efforts will be successful, if required.
In July 2005, Versant, through its subsidiary Versant GmbH, entered into certain agreements to effect a spin-off of tangible assets, technology rights and contracts related to its Versant Open Access .NET (“VOA.NET”) business to Vanatec GmbH (a then newly formed privately held German based company). As a result, in accordance with FIN 46(R), Vanatec’s operating results have been included in Versant’s consolidated financial statements for the three-month periods ended July 31, 2005, October 31, 2005 and January 31, 2006 and through March 27, 2006. On March 27, 2006, Versant sold its entire equity interest in Vanatec to a third party investor and entered into a joint ownership agreement with Vanatec with respect to technology it had previously licensed to Vanatec (see Note 7 for a more detailed description of the Vanatec transaction). As a result of this sale of its interest in Vanatec, as of March 27, 2006, Versant is no longer required to consolidate the operating results of Vanatec.
In February 2006, Versant completed the sale of the assets associated with its WebSphere® consulting practice to Sima Solutions, a newly formed privately held U.S. based corporation. Versant’s WebSphere consulting practice provided consulting and training services to end-users of IBM’s WebSphere® application server software. As a result of this transaction, Versant has ceased conducting its WebSphere consulting practice. In connection with this transaction, twelve employees of Versant, who formerly worked in Versant’s WebSphere consulting practice, left Versant to join Sima Solutions.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which, in the opinion of the Company, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are normal recurring adjustments. These financial statements have been prepared in accordance with generally accepted accounting principles related to interim financial statements and the applicable rules of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
6
The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the Company’s preceding fiscal year ended October 31, 2005. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company’s Annual Report on Form 10-KSB for the fiscal year ended October 31, 2005, filed on January 30, 2006. Operating results for the three and six months ended April 30, 2006 are not necessarily indicative of the results that may be expected for the full fiscal year ending October 31, 2006, or for any future periods. Further, the preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimates could result in a change to the estimates and impact future operating results.
NOTE 2. STOCK-BASED COMPENSATION
Versant maintains a 2005 Equity Incentive Plan, which is a successor and replacement to the Company’s 1996 Equity Incentive Plan. The 2005 Equity Incentive Plan was approved by the Company’s shareholders at the Company’s annual meeting of shareholders held on August 22, 2005. The standard term of stock options granted pursuant to the 2005 Equity Incentive Plan and its 1996 predecessor plan is ten years from the date of grant (subject to earlier termination if the option holder ceases to be employed or otherwise ceases to have a service relationship with the Company). Under the standard vesting schedule for options granted under the 2005 Equity Incentive Plan and its predecessor 1996 Plan, for so long as the option holder continues to be employed by or otherwise provide services to the Company, options vest and become exercisable in installments over a three-year period, with 25% of the shares subject to the option vesting and becoming exercisable on the date nine months after the option was granted and 1/27 of the remaining 75% of the option shares vesting each month thereafter over the next 27 months.
Versant also maintains a 2005 Directors Stock Option Plan, which is a successor and replacement to the Company’s 1996 Directors Stock Option Plan. The 2005 Directors Stock Option Plan was approved by the Company’s shareholders at the Company’s annual meeting of shareholders held on August 22, 2005. Options granted under the 2005 Directors Stock Option Plan and its predecessor 1996 plan are immediately exercisable. However, if a director ceases to be a member of the Company’s board of directors or a consultant to the Company at any time within the two-year period after he or she is granted an option under these plans, then any shares the director purchases upon exercise of such options that are unvested when he or she ceases to be a director or a consultant may, at the Company’s option, be repurchased by the Company at their original purchase price per share. Under the standard vesting schedule for options granted under the 2005 Directors Stock Option Plan and its predecessor 1996 plan, for so long as the option holder continuously serves as a member of the Company’s board of directors or as a consultant, 50% of the shares subject to an option granted to such director under these plans will vest free of the Company’s repurchase option on each of the first two anniversaries of the date such option is granted.
Lastly, the Company maintains a 1996 Employee Stock Purchase Plan, which was approved by the Company’s shareholders in 1996 and which will remain in effect until late May 2006 when it will expire and be replaced by the Company’s 2005 Employee Stock Purchase Plan, a successor plan that will become operative effective June 1, 2006. The 2005 Employee Stock Purchase Plan was approved by the Company’s shareholders at the Company’s annual meeting of shareholders held on August 22, 2005. Under the 1996 Employee Stock Purchase Plan, each offering of common shares thereunder is for a period of twenty-four months, consisting of four six-month purchase periods. Under the 2005 Employee Stock Purchase Plan, each offering of common shares thereunder will be for a period of twelve months, consisting of two six-month purchase periods. The purchase price of shares, which employees may acquire at any purchase period, is 85% of the lesser of either of the following: the fair market value of the shares on the offering date; or the fair market value of the shares on the purchase date.
A more detailed description of each of the above-mentioned stock and stock option plans can be found in Note 10 of the Notes to Consolidated Financial Statements of the Company contained in the Company’s annual report on Form 10-KSB filed with the Securities and Exchange Commission on January 30, 2006.
Prior to November 1, 2005, Versant accounted for the above plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. No option-based employee compensation cost was recognized in the Statement of Operations for the fiscal year ended October 31, 2005, since all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company also did not record any compensation expense in connection with its Employee Stock Purchase Plan since the purchase price of the stock was 85% of the lower of the fair market value of its common stock at the beginning or the end of each offering period, which was within the formerly available safe harbor under SFAS 123 for these fiscal periods.
7
Effective November 1, 2005, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”), using modified-prospective transition method. The recognized compensation costs during fiscal 2006 under the modified-prospective transition method include the following components:
First, compensation cost for all share-based payments granted prior to, but not yet vested as of November 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123.
Second, compensation cost for all share-based payments granted subsequent to November 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).
Versant uses straight-line vesting attribution to evenly distribute the compensation cost over the service period.
The purchase price of shares, which employees may acquire under the Company’s employee stock purchase plan, or ESPP, at any purchase period, is 85% of the lesser of either of the following: the fair market value of the shares on the offering date or the fair market value of the shares on the purchase date. Since the 85% threshold is no longer a safe harbor under SFAS 123(R), Versant recorded the fair value of the shares that will be granted under the November ESPP enrollment in the quarter ended January 31, 2006.
SFAS 123(R) requires companies to estimate forfeiture rates at the time of grant and to revise these estimates in subsequent periods if actual forfeiture rates differ from those estimates. Versant applies the forfeiture rate to the unvested portion of the option valuation and performs a true up for the amount of the valuation to be recorded if the actual forfeiture rate is different from the one applied on prior periods. The current forfeiture rate for the unvested portion of the option valuation recognized for the three months ended April 30, 2006 is at 20%.
Versant estimates the fair value of employee stock options and rights to purchase shares under its employee stock purchase plan, or “ESPP” using a Black-Scholes-Merton Option-Pricing Model. This is consistent with the provisions of SFAS 123(R), SEC Staff Accounting Bulletin No. (“SAB”) 107, Share-Based Payment, and the Company’s prior period pro forma disclosures of net income (loss), including share-based compensation.
The fair value of each option granted and each share issued under the ESPP is estimated on the date of grant, using the Black-Scholes-Merton Model, based on the following weighted average assumptions:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||||||
|
| April 30, |
| April 30, |
| ||||||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
|
| Stock Options |
| ESPP |
| Stock Options |
| ESPP |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life |
| 2.4 years |
| 3 years |
| 6 months |
| 6 months |
| 2.4 to 3 years |
| 3 years |
| 6 months |
| 6 months |
|
Weighted-average Risk-free interest rate |
| 4.59 | % | 3.76 | % | 4.09 | % | 2.41 | % | 4.28% to 4.59% |
| 3.74 | % | 3.2% to 4.09% |
| 1.23% to 2.41% |
|
Volatility |
| 90 | % | 127 | % | 83 | % | 100 | % | 90% to 107% |
| 127 | % | 83 | % | 77% to 100% |
|
Dividend yield |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Versant uses a historical model to arrive at the expected life of its options, but it takes into consideration other factors that could possibly impact the future expected life of the options.
Versant has not granted any options to its board members under its 2005 Directors Plan during the three and the six months periods ended April 30, 2006.
Versant uses the U.S. Treasury Strip rates listed on the last Thursday of every month on The Wall Street Journal to compute risk-free interest rate.
Versant uses the historical volatility over the expected term of the options to estimate the expected volatility. The Company, however, takes into account other current information available to determine the expected volatility. Versant believes that the historical volatility, at this time, represents fairly the future volatility of its common stock.
8
Versant currently does not expect to receive any tax benefits in fiscal 2006 related to stock options or shares issued under its ESPP. Versant currently provides a full valuation allowance for its deferred tax assets, accordingly, a valuation allowance is also provided for any tax effects of stock-based compensation expense pursuant to SFAS 123(R).
Versant has not distributed any dividend to its common shareholders and does not expect to do so in the near future.
The following table illustrates the effect on the Company’s net income and net loss per share for the three and six months periods ended April 30, 2005, as if Versant had applied the fair value recognition provisions of SFAS No. 123(R) to share-based compensation, using the Black-Scholes-Merton Model valuation model (in thousands, except per share data):
|
| Three Months Ended |
| Six Months Ended |
| ||
|
| April 30, |
| April 30, |
| ||
|
| 2005 |
| 2005 |
| ||
Net loss, as reported |
| $ | (1,059 | ) | $ | (714 | ) |
Add: Stock-based employee compensation expense previously included in reported net income, net of related tax effects |
| 24 |
| 50 |
| ||
Deduct: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects |
| (106 | ) | (270 | ) | ||
Pro forma net loss |
| $ | (1,141 | ) | $ | (934 | ) |
|
|
|
|
|
| ||
Basic and diluted net loss per share: |
|
|
|
|
| ||
As reported |
| $ | (0.30 | ) | $ | (0.20 | ) |
Pro forma |
| $ | (0.32 | ) | $ | (0.27 | ) |
The following table summarizes the option activities for the three and six months periods ended April 30, 2006 and April 30, 2005:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||
|
| April 30, |
| April 30, |
| ||||||||||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||||||||
|
| Shares |
| Weighted |
| Shares |
| Weighted |
| Shares |
| Weighted |
| Shares |
| Weighted |
| ||||
|
| in thousands |
| exercise price |
| in thousands |
| exercise price |
| in thousands |
| exercise price |
| in thousands |
| exercise price |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Outstanding at the beginning of the period |
| 307 |
| $ | 23.56 |
| 393 |
| $ | 30.27 |
| 300 |
| $ | 25.02 |
| 460 |
| $ | 31.22 |
|
Granted |
| 22 |
| $ | 6.40 |
| 71 |
| $ | 8.04 |
| 44 |
| $ | 5.17 |
| 75 |
| $ | 8.03 |
|
Exercised |
| (6 | ) | $ | 3.50 |
| (45 | ) | $ | 4.87 |
| (6 | ) | $ | 3.50 |
| (52 | ) | $ | 5.13 |
|
Forfeited |
| (103 | ) | $ | 34.94 |
| (57 | ) | $ | 42.07 |
| (118 | ) | $ | 33.48 |
| (121 | ) | $ | 40.09 |
|
Outstanding at the end of the period |
| 220 |
| $ | 17.07 |
| 362 |
| $ | 27.22 |
| 220 |
| $ | 17.07 |
| 362 |
| $ | 27.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Vested options at the end of the quarter since inception |
| 312 |
| $ | 32.88 |
| 422 |
| $ | 31.71 |
| 312 |
| $ | 32.88 |
| 422 |
| $ | 31.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Options exercised at the end of the quarter since inception |
| 174 |
| $ | 37.58 |
| 168 |
| $ | 39.24 |
| 174 |
| $ | 37.58 |
| 168 |
| $ | 39.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Options exercisable at the end of the quarter |
| 156 |
| $ | 24.49 |
| 277 |
| $ | 26.51 |
| 156 |
| $ | 24.49 |
| 277 |
| $ | 26.51 |
|
The weighted average grant date fair value of options granted during the six months ended April 30, 2006 was $3.23, and the total fair value of shares granted during the six months ended April 30, 2006 was $142,000. The aggregated intrinsic values of options exercised was $23,000 for both three and six months ended April 30, 2006.
The summary of the status of Versant’s nonvested shares as of April 30, 2006 and changes during the six months ended April 30, 2006 is as follows:
|
|
|
| Weighted-average |
| |
|
| Shares |
| grant- date |
| |
Nonvested shares |
| (in thousand) |
| fair value |
| |
|
|
|
|
|
| |
Nonvested at October 31, 2005 |
| 73 |
| $ | 3.47 |
|
Granted |
| 44 |
| 3.23 |
| |
Vested |
| (35 | ) | 2.58 |
| |
Forfeited |
| — |
| — |
| |
Nonvested at April 30, 2006 |
| 82 |
| $ | 3.65 |
|
9
The total unrecognized compensation cost related to nonvested options were $277,000 and $253,000 at April 30, 2006 and October 31, 2005 respectively and will be recognized using the straight-line attribution method ratably for the subsequent three years. We will, however, adjust total stock-based compensation cost for changes in estimated forfeiture rates and true-ups. The total fair value of shares vested during the six months ended April 30, 2006 was $90,000.
NOTE 3. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share excludes the effect of potentially dilutive securities and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share, however, reflects the potential dilution of securities by adding dilutive common stock options and shares subject to repurchase to the weighted average number of common shares outstanding for the period.
Additionally, FASB 128, Earnings per Share, requires that employee equity share options, non-vested shares, and similar equity instruments granted to employees be treated as potential common shares in computing diluted earnings per share. Diluted earnings per share shall be based on the actual number of options or shares granted and not yet forfeited, unless doing so would be antidilutive. If equity share options or other equity instruments are outstanding for only part of a period, the shares issuable shall be weighted to reflect the portion of the period during which the equity instruments are outstanding. The options are included in the diluted earnings per share computation using the treasury stock method and assuming that the proceeds will be used to buy back the Company’s shares. Proceeds equal the hypothetical average unrecognized compensation plus exercise price and hypothetical windfall tax benefits (or a reduction for shortfalls that would be credited to additional paid in capital).
A reconciliation of the numerators and denominators used in the calculation of basic and diluted net income per share is as follows (in thousands, except per share data):
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| April 30, |
| April 30, |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) from continuing operations attributable to common shareholders |
| $ | 651 |
| $ | (1,226 | ) | $ | 1,440 |
| $ | (974 | ) |
Gain from sale of discontinued operations, net of income taxes |
| 468 |
| — |
| 468 |
| - |
| ||||
Earnings from discontinued operations, net of income tax |
| 35 |
| 167 |
| 22 |
| 260 |
| ||||
Net income (loss) attibutable to common shareholders |
| $ | 1,154 |
| $ | (1,059 | ) | $ | 1,930 |
| $ | (714 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Calculation of basic net loss per share: |
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding |
| 3,569 |
| 3,514 |
| 3,564 |
| 3,496 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per share from continuing operations attributable to common shareholders, basic |
| $ | 0.18 |
| $ | (0.35 | ) | $ | 0.40 |
| $ | (0.28 | ) |
Earnings per share from discontinued operations, net of income tax, basic |
| $ | 0.14 |
| $ | 0.05 |
| $ | 0.14 |
| $ | 0.08 |
|
Net income (loss) per share attibutable to common shareholders, basic |
| $ | 0.32 |
| $ | (0.30 | ) | $ | 0.54 |
| $ | (0.20 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Calculation of diluted net income per share: |
|
|
|
|
|
|
|
|
| ||||
Weighted average - common shares outstanding |
| 3,569 |
| 3,514 |
| 3,564 |
| 3,496 |
| ||||
Dilutive securities -common stock options and shares subject to repurchase |
| 9 |
| — |
| 6 |
| - |
| ||||
Weighted average - common shares outstanding and potentially dilutive common shares |
| 3,578 |
| 3,514 |
| 3,570 |
| 3,496 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per share from continuing operations attributable to common shareholders, diluted |
| $ | 0.18 |
| $ | (0.35 | ) | $ | 0.40 |
| $ | (0.28 | ) |
Earnings per share from discontinued operations, net of income tax, diluted |
| $ | 0.14 |
| $ | 0.05 |
| $ | 0.14 |
| $ | 0.08 |
|
Net income (loss) per share attibutable to common shareholders, diluted |
| $ | 0.32 |
| $ | (0.30 | ) | $ | 0.54 |
| $ | (0.20 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Anti-dilutive common stock options, not included in net income per share calculation |
| 263 |
| 449 |
| 263 |
| 449 |
|
NOTE 4. OTHER COMPREHENSIVE INCOME (LOSS)
10
Other comprehensive income (loss) presented in the accompanying consolidated balance sheet consists of cumulative foreign currency translation adjustments.
Other comprehensive income (loss) for the three and six months periods ended April 30, 2006 and April 30, 2005, is as follows (in thousands):
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| April 30, |
| April 30, |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Net income (loss), as reported |
| $ | 1,154 |
| $ | (1,059 | ) | $ | 1,930 |
| $ | (714 | ) |
Foreign currency translation adjustment |
| 99 |
| 101 |
| 122 |
| 156 |
| ||||
Other comprehensive income (loss) |
| $ | 1,253 |
| $ | (958 | ) | $ | 2,052 |
| $ | (558 | ) |
NOTE 5. SEGMENT AND GEOGRAPHIC INFORMATION
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company’s chief operating decision-maker is considered to be the Company’s chief executive officer (CEO). The CEO reviews financial information presented on an entity level basis accompanied by non-aggregated information about revenues by product type and certain information about geographic regions for purposes of making operating decisions and assessing financial performance. The entity level financial information is identical to the information presented in the accompanying statements of operations. Therefore, the Company has determined that it operates in a single Data management operating segment.
The Company operates in North America, Europe and Asia. In general, revenues are attributed to the country in which the contract was originated.
The following table reflects revenues for the three end six months periods ended April 30, 2006 and April 30, 2005 by each geographic region (in thousands):
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| April 30, |
| April 30, |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Revenues by region: |
|
|
|
|
|
|
|
|
| ||||
North America |
| $ | 1,110 |
| $ | 1,112 |
| $ | 2,445 |
| $ | 2,522 |
|
Europe |
| 2,566 |
| 1,897 |
| 5,753 |
| 5,722 |
| ||||
Asia |
| 104 |
| 201 |
| 207 |
| 248 |
| ||||
Total |
| $ | 3,780 |
| $ | 3,210 |
| $ | 8,405 |
| $ | 8,492 |
|
The following table reflects long-lived assets as of April 30, 2006 and October 31, 2005 in each region (in thousands):
11
|
| As of April 30, |
| As of October 31, |
| ||
|
| 2006 |
| 2005 |
| ||
Long-lived assets by region: |
|
|
|
|
| ||
North America |
| $ | 463 |
| $ | 496 |
|
Europe |
| 154 |
| 183 |
| ||
Asia |
| 100 |
| 104 |
| ||
Total |
| $ | 717 |
| $ | 783 |
|
NOTE 6. RESTRUCTURING
Versant has undergone several restructuring programs since fiscal 2004 with the intent of reducing its ongoing operating costs.
In June 2005, Versant committed to and began implementing a restructuring program to realign its resources to focus on its Versant Object Database product. Versant assessed its product portfolio and associated research and development efforts and expenditures, and then streamlined the rest of its operations to support those reassessments. Versant planned to spin off and eliminate marginally profitable or non-strategic products lines, consolidate development activities, eliminate four management positions and certain duplicate positions in marketing functions and programs, and centralize its sales support functions.
In July 2005, Versant, through its subsidiary Versant GmbH, entered into certain agreements to effect a spin-off of tangible assets, technology rights and contracts related to its Versant Open Access .NET (“VOA.NET”) business to Vanatec GmbH (“Vanatec”), a then newly formed privately held German based company. In connection with that spin-off, seven former Versant employees departed Versant to join Vanatec, and a partnership formed by those individuals, received an 80.4% equity interest in Vanatec, with Versant retaining the remaining 19.6% equity interest. In connection with that spin-off, on July 29, 2005, Versant committed to provide funding to Vanatec in a total amount not to exceed 425,000 euros (or $520,000) in two equal installments of 212,500 euros (or $260,000) each on August 3, 2004 and November 3, 2005, which Versant contributed to Vanatec. In addition, during the three months ended July 31, 2005, Versant contributed 25,000 euros (or $30,000) to Vanatec; therefore, the total cash capital contributed and committed by Versant to Vanatec was 450,000 euros (or $550,000).
VOA.NET was one of the aforementioned non-strategic product lines which Versant decided to spin off as part of its restructuring efforts designed to enable Versant to focus on its core database business and progress towards its long-term profitability goal. Versant believes that the dissolution of the VOA.NET business would have caused Versant to incur cash outlays and expenses for severance and other contractual obligations in amounts comparable to the restructuring charge resulting from the Vanatec’s spin-off. Versant has committed no additional funding beyond the $550,000, referred to above, and has no further obligations to Vanatec.
Versant recorded total restructuring charges of approximately $84,000 and $218,000 for the three and six months ended April 30, 2006, which consist primarily of severance payments due to headcount reductions.
As of April 30, 2006, there remains $849,000 restructuring accrual and zero variable interest entity liability on Versant’s consolidated balance sheet.
The following table summarizes the Company’s restructuring activities from October 31, 2005 through April 30, 2006 (in thousands):
12
|
| Facility |
| Employee |
|
|
|
|
| ||||
|
| Leases |
| Terminations |
| Others/Vanatec |
| Total |
| ||||
Opening balance at October 31, 2005 |
| $ | 1,181 |
| $ | — |
| $ | 137 |
| $ | 1,318 |
|
Facility lease payments during the three months ended January 31, 2006 |
| (192 | ) | — |
| (137 | ) | (329 | ) | ||||
Adjustments during the three months ended January 31, 2006 |
| 4 |
| 119 |
| 13 |
| 136 |
| ||||
Payments during the three months ended January 31, 2006 |
| (2 | ) | (119 | ) | (13 | ) | (134 | ) | ||||
Accrual and variable interest liability as of January 31, 2006 |
| $ | 991 |
| $ | — |
| $ | — |
| $ | 991 |
|
Facility lease payments during the three months ended January 31, 2006 |
| (151 | ) | — |
| — |
| (151 | ) | ||||
Adjustments during the three months ended April 30, 2006 |
| 35 |
| 58 |
| — |
| 93 |
| ||||
Payments during the three months ended April 30, 2006 |
| (26 | ) | (58 | ) | — |
| (84 | ) | ||||
Accrual and variable interest liability as of April 30, 2006 |
| $ | 849 |
| $ | — |
| $ | — |
| $ | 849 |
|
The facility lease payments during the three months ended January 31, 2006 and April 30, 2006 were related to Versant’s obligations for its California and European facilities, which were accrued for as part of the restructuring plans.
NOTE 7. CONSOLIDATION OF VARIABLE INTEREST ENTITY
Versant in July 2005 through its subsidiary Versant GmbH, entered into certain agreements to effect a spin-off of tangible assets, technology rights and contracts related to its Versant Open Access .NET (“VOA.NET”) business to Vanatec GmbH (a then newly formed privately held German based company). Versant, subsequent to this agreement, determined that the equity at risk in Vanatec was not sufficient to permit the company to finance its activities without additional subordinated financial support from Versant; therefore, it considered Vanatec a variable interest entity in accordance with FIN 46(R), Consolidation of Variable Interest Entities (As Amended).
As a result, in accordance with FIN 46(R), Vanatec’s operating results were included in Versant’s consolidated financial statements for the three-month periods ended July 31, 2005, October 31, 2005 and January 31, 2006. During the three months ended January 31, 2006, Versant absorbed its share of Vanatec’s losses up to the point that it exceeded the variable interest liability; and subsequent to that it continued to absorb 100% of the losses that Vanatec had incurred for an additional amount of $35,000 for the three months ended January 31, 2006. For the three month ended April 30, 2006, Versant continued to absorb 100% of Vanatec’s losses for an additional amount of $70,000 for the period between February 1, 2006 and March 27, 2006.
On March 27, 2006, Versant sold its 19.6% interest in Vanatec to a third party investor for 4,900 euros and entered into a joint ownership agreement with Vanatec. According to this agreement, Vanatec shall pay Versant a running royalty interest at a rate of six percent of its net proceeds, but no less than 30 euros per copy of the technology subject to the licenses granted, for a period of five years following the effective date of the agreement. Further, at any time during the royalty period, Vanatec has the right to exercise a buyout for its royalty obligations by making a one-time payment to Versant of 450,000 euros. As a result of the aforementioned transaction, Versant determined that it is no longer the primary beneficiary of Vanatec, and thus, in accordance with FIN 46(R) is no longer required to consolidate its operating results effective March 27, 2006.
Nevertheless, Versant continued to absorb 100% of Vanatec’s losses for an additional amount of $70,000 for the period between February 1, 2006 and March 27, 2006. As Versant is no longer required to consolidate the operating results of Vanatec as of March 27, 2006, it recorded a gain of approximately $131,000 on deconsolidation, representing the reversal of the excess losses that it had absorbed and the consideration that it received from the third party investor in lieu of its interest in Vanatec. The gain is reported as Gain on Disposal of Variable Interest Entity in the accompanying condensed consolidated statements of operations for the three and six months ended April 30, 2006. .
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
The goodwill balances as of April 30, 2006 and October 31, 2005 are as follows (in thousands):
13
|
| As of April 30, 2006 |
| As of October 31, 2005 |
| ||||||||||||||
|
| Gross |
|
|
| Net |
| Gross |
|
|
| Net |
| ||||||
|
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying |
| ||||||
|
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount |
| ||||||
Goodwill: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Versant Europe and India |
| $ | 3,277 |
| $ | 3,036 |
| $ | 241 |
| $ | 3,277 |
| $ | 3,036 |
| $ | 241 |
|
Poet Holdings, Inc. |
| 5,752 |
| — |
| 5,752 |
| 5,752 |
| — |
| 5,752 |
| ||||||
FastObjects, Inc. |
| 677 |
| — |
| 677 |
| 677 |
| — |
| 677 |
| ||||||
JDO Genie (PTY), LTD. |
| 50 |
| — |
| 50 |
| 50 |
| — |
| 50 |
| ||||||
Total |
| $ | 9,756 |
| $ | 3,036 |
| $ | 6,720 |
| $ | 9,756 |
| $ | 3,036 |
| $ | 6,720 |
|
Intangible assets consist of acquired technology and customer relationships amortized over a period between five and eight years. The Company’s intangible assets balances as of April 30, 2006 and October 31, 2005 are as follows (in thousands):
|
| As of April 30, 2006 |
| As of October 31, 2005 |
| ||||||||||||||
|
| Gross |
|
|
| Net |
| Gross |
|
|
| Net |
| ||||||
|
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying |
| ||||||
|
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount |
| ||||||
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Poet Holdings, Inc. (Amortized over 7 yrs) |
| $ | 1,919 |
| $ | 981 |
| $ | 938 |
| $ | 1,919 |
| $ | 887 |
| $ | 1,032 |
|
JDO Genie (PTY), LTD. (Amortized over 5 yrs) |
| 550 |
| 202 |
| 348 |
| 550 |
| 146 |
| 404 |
| ||||||
FastObjects, Inc. (Amortized over 6 yrs) |
| 148 |
| 80 |
| 68 |
| 148 |
| 72 |
| 76 |
| ||||||
Total |
| $ | 2,617 |
| $ | 1,263 |
| $ | 1,354 |
| $ | 2,617 |
| $ | 1,105 |
| $ | 1,512 |
|
The projected amortization of intangible assets as of April 30, 2006 is as follows (in thousands):
| Amortization |
| ||
|
|
|
| |
Six months ending October 31, 2006 |
| $ | 157 |
|
Fiscal year ending October 31, |
|
|
| |
2007 |
| 315 |
| |
2008 |
| 315 |
| |
2009 |
| 279 |
| |
2010 |
| 201 |
| |
Thereafter |
| 87 |
| |
Total |
| $ | 1,354 |
|
NOTE 9. WARRANTY INDEMNIFICATION OBLIGATIONS
Versant recognizes warranty and indemnification obligations under FASB Statement No. 5 (As Amended), Accounting for Contingencies, FASB Interpretation No. (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and FASB Concepts Statement No. (“SFAC”) 7 (As Amended), Using Cash Flow Information and Present Value in Accounting Measurements. These pronouncements require a guarantor to recognize and disclose a liability for obligations it has undertaken in relation to the issuance of the guarantee.
The Company’s software license agreements generally include certain provisions for indemnifying customers against liabilities if the Company’s software products infringe upon a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of any indemnification; therefore, the Company has not accrued any expenses for such indemnity liabilities either in the U.S. or Europe.
The Company’s software license agreements also generally include a warranty that the Company’s software products will substantially operate as described in the applicable program documentation. The Company also warrants that services the Company performs will be provided in a manner consistent with industry standards. To date, Versant has not incurred any material costs associated with these warranties, and as such the Company has not provided for any reserves for any such warranty liabilities in its U.S. operation results.
14
In Europe, however, there is a statutory one-year warranty requirement for all the Company’s products and services. As a result, Versant had a warranty reserve of $105,000 as of April 30, 2006, compared to $8,000 at October 31, 2005.
NOTE 10. RELATED PARTY TRANSACTION
The Company paid one of its directors, Bernhard Woebker, $15,000 and $30,000 for the three and six months ended April 30, 2006, respectively for consulting services. These amounts were in addition to the sum that the Company paid to Mr. Woebker as part of the Company’s standard compensation to outside, non-employee directors.
NOTE 11. FORFEITURE OF COMMON STOCK
In October 2004, Systems America Inc. served a complaint against Versant in a lawsuit alleging that former employees of Systems America who left that company to form Mokume Software, Inc. (“Mokume”) misappropriated Systems America trade secrets and confidential information, unfairly competed with Systems America and infringed Systems America’s trademarks. The Systems America suit alleged that when Versant acquired Mokume in November 2002, it acquired the benefit of the allegedly misappropriated trade secrets, confidential information, customer relationships, trademarks and trade names, and thus Systems America sought damages and injunctive relief from Versant. In connection with this litigation, Versant in turn sought indemnification from the former stockholders of Mokume under the terms of the merger agreement pursuant to which Versant acquired Mokume in November 2002. Versant’s indemnification claims were made on the grounds that the allegations in and the existence of the Systems America litigation constituted a breach of certain representations and warranties made by the former Mokume stockholders to Versant in the merger agreement. Versant’s indemnification rights entitled Versant to obtain indemnification by canceling and recovering certain shares of Versant Common Stock issued to the former Mokume stockholders in connection with Versant’s acquisition of Mokume. Pursuant to a written agreement with the representative of the former Mokume stockholders in accordance with the merger agreement, 8,998 shares of Versant Common Stock for $50,000 held by the former Mokume stockholders were forfeited and cancelled as of January 12, 2006 in satisfaction of Versant’s indemnification rights.
NOTE 12. DISCONTINUED OPERATIONS
On February 1, 2006 Versant completed the sale of the assets associated with its WebSphere consulting practice to Sima Solutions, a privately held U.S. based company. Versant’s WebSphere practice provided consulting and training services to end-users of IBM’s WebSphere® application server software. As a result of this transaction Versant ceased conducting its WebSphere practice. In connection with Versant’s sale of its WebSphere assets, certain employees of Versant, who formerly worked in Versant’s WebSphere Practice, joined Sima Solutions.
The WebSphere transaction, based on SFAS 144, Impairments of Long-Lived Assets and Discontinued Operations, met the criteria of a long-lived asset (disposal group) held for sale at the end of the first quarter ended January 31, 2006. As a result, Versant has reflected the results of operations of its WebSphere consulting practice for the three and six months ended April 30, 2006 and April 30, 2005 as discontinued operations. Therefore, reported revenues for these periods no longer include any revenues from the WebSphere consulting practice. The results from the discontinued WebSphere operations, however, are reported as net income from discontinued operations, net of income taxes.
The sale of Versant’s WebSphere consulting practice assets was consummated pursuant to an Asset Purchase Agreement dated February 1, 2006 (the “Sale Agreement”) between Versant and Sima. Pursuant to the Sale Agreement, Sima acquired assets, consisting principally of certain contracts with customers, contractors and business partners of Versant’s WebSphere consulting practice, an office lease in the Chicago, Illinois area, certain office equipment, customer lists, marketing information and marketing collateral. In exchange for these assets, Sima assumed certain liabilities associated with the WebSphere consulting practice, paid Versant $500,000 in cash and agreed to make certain contingent cash “earn-out” payments to Versant based on varying percentages of the revenues Sima collects from its operation of the WebSphere practice during the 24-month period immediately following closing of this transaction, substantially as follows:
· During the first twelve months following the closing of the sale to Sima (the “First Year”), Sima has agreed to pay Versant: (i) 12% of the first $3.74 million of earn-out revenue collected during the First Year, if any; (ii) 5% of the next $2.0 million of earn-out revenue collected during the First Year, if any; and (iii) 2% of any other earn-out revenue collected during the First Year in excess of $5.74 million.
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· During the second twelve months immediately following the First Year (the “Second Year”), Sima has agreed to pay Versant: (i) 12% of the first $3.74 million of earn-out revenue collected during the Second Year, if any; (ii) 5% of the next $2.0 million of earn-out revenue collected during the Second Year, if any; and (iii) 2% of any other earn-out revenue collected during the Second Year in excess of $5.74 million.
The above earn-out payment formula is subject to certain adjustments, including adjustments which reduce the dollar thresholds at which the percentages of earn-out revenue are to be paid under the above formula if certain former Versant employees do not remain employed by Sima for a certain time period following the closing of the WebSphere transaction. Versant expects some normal attrition on the number of the former employees of Versant, who are currently working for Sima. Any potential earn-out payments will be recognized if and when achieved during the remainder of fiscal 2006 and beyond.
The WebSphere sale transaction is reflected in the quarter ending April 30, 2006. The following table reflects the gain from the disposal of the discontinued Websphere operation and earnings from discontinued operations, net of income taxes for WebSphere.
| Amount |
| ||
WebSphere sales proceeds |
| $ | 500,000 |
|
Lease cancellation |
| (23,777 | ) | |
Legal fees |
| (7,945 | ) | |
Gain from sale of discontinued operations, net of income taxes |
| $ | 468,278 |
|
|
|
|
| |
WebSphere quarterly royalty |
| $ | 40,910 |
|
Others WebSphere revenues net of expenses |
| (6,118 | ) | |
Net income from discontinued operations, net of income taxes |
| $ | 34,792 |
|
|
|
|
| |
Total |
| $ | 503,070 |
|
NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion 20, Accounting Changes and SFAS 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and that corrections of previously issued financial statements should be termed a restatement. The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.
In June 2005, the Financial Accounting Standards Board ratified the consensus reached by the Emergency Issues Task Force (EITF) 05-05. This new standard addresses Altersteilzeit (ATZ) arrangements, an early retirement program in Germany designed to create an incentive for employees, within a certain age group, to transition from (full or part-time) employment into retirement before their legal retirement age. The consensus in this Issue should be applied to fiscal years beginning after December 15, 2005. Adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the Company’s financial statements and accompanying notes included in this report and the 2005 audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended October 31, 2005 filed with the Securities and Exchange Commission (“SEC”) on January 30, 2006. Our historic operating results are not necessarily indicative of results that may occur in future periods.
The following discussion and analysis contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The forward-looking statements include, among other things,
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statements regarding the Company’s expected future financial performance, assets, liquidity and trends anticipated for the Company’s business. These statements are based on the Company’s current expectations, assumptions, estimates and projections about the Company’s business and the Company’s industry, which are based on information that is reasonably available to the Company as of the date of this report. Forward-looking statements many include words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “should,” “estimates,” “predicts,” “forecasts,” “guidance,” “potential,” “continue” or the negative of such terms or other similar expressions. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual operating results, levels of activity, performance or achievement to be materially different from any future operating results, levels of activity, performance or achievements that are expressed, forecasted, projected, implied in or anticipated or contemplated by the forward-looking statements. These known and unknown risks, uncertainties and other factors include, but are not limited to, those risks, uncertainties and factors discussed under the subheading “Risk Factors” in this Item 2 and those discussed elsewhere in this report, in the Company’s other SEC filings and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s report on Form 10-KSB for the fiscal year ended October 31, 2005. Versant undertakes no obligation to revise or update any forward-looking statement in order to reflect events or circumstances that may arise or occur after the date of this report.
Certain Industry Terms
We have listed below, for reference purposes, certain technical terms that are well known and often used in our industry. We have defined these terms here to assist readers in better understanding the information provided in this report:
· Relational Database is a type of data management software that stores data as tables and columns and can be accessed using an industry standard language called SQL.
· Application Server Software is a form of deployment software that is used to build and deploy Internet applications, including commercial websites and internal company websites.
· Cache — Performance works with servers to improve and enhance their response times and throughput.
· Integration Framework can connect two disparate pieces of software together.
· XML is the standard format used to exchange data (information) between multiple software systems.
· Object-Oriented refers to a form of software that uses smaller building blocks called objects to create larger software systems.
· Data Integration is a broad term for a variety of techniques that enable the data used by one software system to be used in other software systems.
· Replication is a range of technical methods that enable multiple databases to be approximately synchronized, or to contain the same data.
· Disk Mirroring uses specialized software, and often specialized hardware, to get the same data on two storage disks for the purpose of increasing the reliability or making a quick snapshot (duplicate backup) of a database.
· Fault Tolerant Server is a server that offers higher reliability by the use of duplicated hardware and specialized software. If a failure occurs in one of the databases, the surviving database will continue to provide normal service.
· J2EE-based is an application or software component that is deployed in a Java 2 Enterprise Edition (J2EE) software environment.
· Zero-administration is an application that has been constructed so that no intervention from a Database Administrator is required.
· Native-Applications are constructed from a large number of individual software pieces. The construction is usually easier and resulting application more reliable when the software pieces are built using the same software language, with
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compatible interaction methods, and running on the same operating system. These interactions would be called “native”. In the less-desirable case, there will the need for conversions and adaptations, and the interactions could be called “non-native”.
Background and Overview
We design, develop, market and support high performance object database management, data access and data integration software systems and provide related services to address the complex data management needs of enterprises and providers of products requiring data management functions. Our products and services collectively comprise our single operating segment, which we call “Data Management”.
Our products are typically used by customers to manage data for business systems to enable these systems to access and integrate data necessary for their data management applications. Our data management products and services offer customers the ability to manage real-time, XML and other types of hierarchical and navigational data. We believe that by using our data management solutions, customers cut hardware costs, accelerate and simplify development, significantly reduce administration costs and deliver products with a significant competitive edge.
Our Data Management business is currently comprised of the following key products:
· Versant Object Database, a seventh generation object database management system, is used in high-performance, large-scale, real-time applications. Our former product, Versant enJin, has been replaced by Versant Object Database using Java Data Object (JDO) and the Java Persistence API language interface.
· Versant Developer Suite (VDS), a sixth generation object database management system, is designed to support multi-user, commercial applications in distributed environments. VDS enables users to store, manage, and distribute information that they believe often cannot be administered effectively through traditional database technologies.
· FastObjects, an object-oriented database management system, is designed to be embedded as a high performance component into customers’ applications and systems. FastObjects is used in a vast range of applications, including medical devices, vending machines, telecom equipment and defense systems.
In addition to our product offerings, to assist users in developing and deploying applications based on Versant Object Database, VDS and FastObjects, we offer a variety of services, including consulting, training and technical support services.
In addition to these products and services, we resell related software developed by third parties. To date, substantially all of our revenues have been derived from the following data management products and related services:
· sales of licenses for Versant Object Database, VDS, FastObjects, and to a much lesser extent, Versant Open Access;
· maintenance and technical support services for our products;
· consulting services (Versant and Poet consulting practice and our former dedicated IBM WebSphere consulting practice, which we sold in February 2006) and training services;
· nonrecurring engineering fees received in connection with providing services associated with Versant Object Database, VDS and FastObjects;
· the resale of licenses, and maintenance, training and consulting services, for third-party products that complement Versant Object Database, VDS and FastObjects;
· reimbursements received for out-of-pocket expenses we incur and which are recorded as revenues in our statement of operations.
Critical Accounting Policies and Estimates
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The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amount of our assets and liabilities at the date of the financial statements and of our revenues and expenses during the reporting period. We base these estimates and judgments on information reasonably available to us, such as our historical experience and trends and industry, economic and seasonal fluctuations, and on our own internal projections that we derive from that information. Although we believe our estimates to be reasonable under the circumstances, there can be no assurances that such estimates will be accurate given that the application of these accounting policies necessarily involves the exercise of subjective judgment and 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 the portrayal of our financial condition and results of operations. These critical accounting policies relate to revenue recognition, goodwill and acquired intangible assets, allowance for doubtful accounts, stock-based compensation, restructuring charges, and income taxes.
Revenue Recognition
We recognize revenues in accordance with the provisions of Statement of Position (SOP) 97-2, Software Revenue Recognition, SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenues consist mainly of revenues earned under software license agreements, maintenance support agreements (otherwise known as post-contract customer support or “PCS”), and agreements for consulting and training activities.
We use the residual method to recognize revenues when a license agreement includes one or more elements to be delivered at a future date. If there is an undelivered element under the license arrangement, we defer revenues based on vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered element, as determined by the price charged when the element is sold separately. If VSOE of fair value does not exist for all undelivered elements of a transaction, we defer all revenues from that transaction until sufficient evidence exists or all elements have been delivered. Under the residual method, discounts are allocated only to the delivered elements in a multiple element arrangement, with any undelivered elements being deferred based on the vendor-specific objective evidence of the value of such undelivered elements. We typically do not offer discounts on future undeveloped products.
Revenues from software license arrangements, including prepaid license fees, are recognized when all of the following criteria are met:
· Persuasive evidence of an arrangement exists.
· Delivery has occurred and there are no future deliverables except PCS.
· the fee is fixed and determinable. If we cannot conclude that a fee is fixed and determinable, then assuming all other criteria have been met, we recognize the revenues, as payments become due in accordance with paragraph 29 of SOP 97-2.
· Collection is probable. Probability of collection is assessed using the following customer information: credit service reports, bank and trade references, public filings, and/or current financial statements. Prior payment experience is reviewed on all existing customers. Payment terms in excess of our standard payment terms of 30-90 days net are granted only on an exception basis, typically in situations where customers elect to purchase development and deployment licenses simultaneously for an entire project and are attempting to align their payments with their deployment schedules. Extended payment terms are only granted to customers with a proven ability to pay at the time the order is received, and with prior approval of our senior management. In accordance with paragraph 27 of SOP 97-2, we have an established history of collection, without concessions, on longer-term receivables. We typically do not grant extended payment terms beyond 90 days.
If an acceptance period or other contingency exists, revenues are not recognized until customer acceptance or expiration of the acceptance period, or satisfaction of the contingency, as applicable. Our license fees are non-cancelable and non-refundable, and we do not make concessions or grant refunds for any unused amount. Also, our customer agreements for prepaid deployment licenses do not make payment of our license fees contingent upon the actual deployment of the software. Therefore, a customer’s delay or acceleration in its deployment schedule does not impact our revenue recognition. Revenues from related PCS for all product lines are usually billed in advance of the service being provided and are deferred and recognized on a straight-line basis over the term in which the PCS is to be performed, which is generally twelve months. In some cases PCS revenues are paid in arrears of the service being provided and are recognized as revenues at the time the customer provides a report to us for
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deployments made during a given time period. Training and consulting revenues are recognized when a purchase order is received, the services have been performed and collection is deemed probable. Consulting services are billed on an hourly, daily or monthly rate. Training classes are billed based on group or individual attendance.
We categorize our customers into two broad groups, End-Users and Value Added Resellers (VARs). End User customers are companies who use our products internally and do not redistribute the product outside of their corporate organizations. VAR customers include traditional Value Added Resellers, Systems Integrators, OEMs and other vendors who redistribute our products to their external third party customers, either individually or as part of an integrated product.
We license our data management products through two types of perpetual licenses — development and test licenses and deployment licenses. Development and test licenses are typically sold on a per seat basis and authorize a customer to develop and test an application program that uses our software product. Prior to an End-User customer being able to deploy an application that it has developed under our development license, it must purchase deployment licenses based on the number of computers connected to the server that will run the application using our database management system. For certain applications, we offer deployment licenses priced on a per user basis. Pricing of Versant Object Database, VDS, and FastObjects licenses varies according to several factors, including the number of computer servers on which the application runs and the number of users that are able to access the server at any one time. Customers may elect to simultaneously purchase development and deployment licenses for an entire project. These development and deployment licenses may also provide for prepayment of a nonrefundable amount for future deployment.
VARs and distributors purchase development licenses from us on a per seat basis on terms similar to those of development licenses sold directly to End-Users. VARs are authorized to sublicense deployment copies of our data management products that are either bundled or embedded in the VAR’s applications and sold directly to End-Users. VARs are required to report their distribution of our software and are charged a royalty that is based either on the number of copies of our application software that are distributed or computed as a percentage of the selling price charged by the VARs to their end-user customers. These royalties from VARs may be prepaid in full or paid upon deployment. Provided that all other conditions for revenue recognition have been met, revenues from arrangements with VARs are recognized, (i) as to prepaid license arrangements, when the prepaid licenses are sold to the VARs, and (ii) as to other license arrangements, at the time the VAR provides a royalty report to us for sales made by the VAR during a given period.
Revenues from the resale of third-party products or services are recorded at total contract value with the corresponding cost included in the cost of sales when we act as a principal in these transactions by assuming the risks and rewards of ownership (including the risk of loss for collection, delivery or returns). When we do not assume the risks and rewards of ownership, revenues from the resale of third-party products or services are recorded at contract value net of the cost of sales.
In some instances that a customer requests engineering work for porting our products to an unsupported platform or customization of our software for specific functionality, or any other non-routine technical assignment, we recognize revenues in accordance with SOP 81-1 Accounting Research Bulletin (“ARB”) No. 45 (As Amended), Long-Term Construction-Type Contracts, and use either time and material percentage of completion or completed contract methods for recognizing revenues. We use the percentage of completion method if we can make reasonable and dependable estimates of labor costs and hours required to complete the work in question. We periodically review these estimates in connection with work performed and rates actually charged and recognize any losses when identified. Progress to completion is determined using the cost-to-cost method, whereby cost incurred to date as a percentage of total estimated cost determines the percentage completed and revenue recognized. When using the percentage of completion method, the following conditions must exist:
· An agreement must include provisions that clearly specify the rights regarding goods or services to be provided and received by both parties, the consideration to be exchanged and the manner and terms of settlement.
· The customer is able to satisfy their obligations under the contract.
· Versant is able to satisfy its obligations under the contract.
The completed contract method is used when reasonable or dependable estimates cannot be made. As a result, in such situations, we defer all revenues until such time that the work is fully completed.
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Management makes significant judgments and estimates in connection with the determination of the revenue recognized in each accounting period. If we had made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized would have resulted.
Goodwill and Acquired Intangible Assets
We account for purchases of acquired companies in accordance with SFAS No. 141, Business Combinations and account for the related acquired intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with SFAS 141, we allocate the cost of the acquired companies to the identifiable tangible and intangible assets acquired according to their respective fair values as of the date of completion of the acquisition, with the remaining amount being classified as goodwill. Certain intangible assets, such as acquired technology, are amortized to expense over time, while in-process research and development costs (“IPR&D”), if any, are charged to operations expenditures at the time of acquisition.
We test for any goodwill impairment within our single Data Management operating segment. All our goodwill has been aggregated from, and acquired in connection with, the following acquisitions:
· Versant Europe, acquired in 1997;
· Poet Holdings, Inc., acquired in March 2004;
· Technology of JDO Genie (PTY) Ltd, acquired in June 2004; and
· FastObjects, Inc., acquired in July 2004.
We test goodwill for impairment in accordance with SFAS 142, which requires that goodwill be tested for impairment at the reporting unit level, at least annually and more frequently upon the occurrence of certain events, as provided in SFAS 142. We use the market approach to assess the fair value of our assets and this value is compared with the carrying value of those assets to test for impairment. The total fair value of our assets is estimated by summing the fair value of our equity less our liabilities. Under this approach, if the estimated fair value of our assets is greater than the carrying value of these assets, then there is no goodwill impairment. If the estimated fair value of our assets is less than the carrying value of these assets, then we allocate the reporting unit’s estimated fair value to its assets and liabilities as though the reporting unit had just been acquired in a business combination. The impairment loss is the amount, if any, by which the implied fair value of goodwill allocable to the reporting unit is less than that reporting unit’s goodwill carrying amount and would be recorded in operating results during the period of such impairment.
As required by SFAS 142, we ceased amortizing goodwill effective November 1, 2002. Prior to November 1, 2002, we amortized goodwill over five years using the straight-line method.
Identifiable intangibles are currently amortized over five years in relation to the JDO Genie (PTY) Ltd acquisition, six years in relation to the FastObjects, Inc. acquisition, and seven years in relation to our acquisition of Poet, using the straight-line method in each of these cases.
Allowance for Doubtful Accounts
We make judgments as to our ability to collect outstanding accounts receivable and provide an allowance for a portion of our accounts receivable if collection becomes doubtful. We also make judgments about the creditworthiness of our customers, based on ongoing credit evaluations and the aging profile of customers’ accounts receivable, as well as the current economic trends that might impact the level of credit losses in the future. Historically, our allowance for doubtful accounts has been sufficient to cover our actual credit losses. However, since we cannot predict changes in the financial stability of our customers, we cannot guarantee that our allowance will continue to be sufficient. If actual credit losses exceed the allowance that we have established, it would increase our operating expenses and reduce our reported net income or increase our net loss. We evaluate and revise our bad debt allowance as part of our quarter end process at each subsidiary and corporate level. Our management assigns a risk factor and percentage of risk to each account receivable, the collection of which is considered non-routine. We also assign a general reserve to all our overdue accounts, excluding the non-routine items. Our allowance for doubtful accounts amounted to $20,000, or 1.4% of gross accounts receivable, and $174,000, or 6% of gross accounts receivable, at April 30, 2006 and April 30, 2005, respectively. The reduction in the allowance for doubtful accounts at April 30, 2006 as compared to April 30, 2005 is due to continued favorable collection history during the past year and an overall reduction in our accounts receivable balances outstanding due to divesture of WebSphere consulting practice.
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Stock-Based Compensation Expense
In December 2004, FASB revised SFAS No. 123 and issued SFAS No.123(R), Share-Based Payment, which requires companies to expense the estimated fair value of employee stock options and similar awards. In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 creates a framework that is premised on two overarching themes: (a) considerable judgment will be required to successfully implement SFAS 123(R), specifically when valuing employee stock options; and (b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. We have applied the principles of SAB 107 in conjunction with our adoption of SFAS 123(R) in fiscal 2006.
We have exercised significant judgment and estimates to determine the variables used in calculation of the stock-based compensation.
We chose the closed-form model of Black-Scholes-Merton as our option-pricing model to arrive at stock options expense valuation. The Black-Scholes-Merton formula assumes that option exercises occur at the end of an option’s contractual term, and that expected volatility, expected dividends, and risk-free interest rates are constant over the options’ term.
The expected life of an employee share option is the period of time that it is expected to be outstanding. We use a historical model to arrive at the expected life of our options, but we also take into consideration other factors that could possibly impact the future expected life of the options. We determined that the estimated expected life of the options granted under our Equity Incentive Plan during the three months ended April 30, 3006 was 2.4 years. We believe that none of the variables, such as, the vesting period, expected volatility, blackout periods and employee demographics have materially changed. Therefore, we have concluded that the historical expected life represents fairly the expected future life of the options at this time.
We have further estimated that the expected life of rights to purchase shares under our ESPP is six months, which is the duration of each purchase period in our plan.
Volatility is a measure of the amount by which a financial variable, such as share price, has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during the expected life of the options. The Black-Scholes-Merton formula does not incorporate a range of expected volatilities over the option’s expected life. We use the historical volatility over the expected term of the options to estimate the expected volatility. We calculate the standard deviation of price changes for the periods of four years, three years, two years, one and half years, one year and half a year. Then, we calculate historical volatility for the past four, three, two, one and half, one, and half-year periods. We, however, take into account other current information available to determine that the expected volatility, derived based on historical volatility, represents fairly the future volatility of our common stock. At this time, we do not believe that there is any indication that future volatility will differ from historical volatility. We have estimated that our volatility is 90% for the three months ended April 30, 2006.
We use the U.S. Treasury Strip rates listed on the last Thursday of every month on the Wall Street Journal to compute risk-free interest rate.
We have not distributed any dividends to our common shareholders and do not expect to do so in the near future.
We estimate forfeiture rates at the time of grant and revise it in subsequent periods if actual forfeiture rates differ from those estimates. We apply the forfeiture rate to the unvested portion of the option valuation and perform a true up for the amount of the valuation to be recorded if the actual forfeiture rate is different from the one applied on prior periods. The current forfeiture rate for the unvested portion of the option valuation recognized for the three months ended April 30, 2006 is at 20%. Since our current stock price is significantly higher than the offering price at the beginning of the ESPP purchase period in the current enrollment plan, we assumed that all the participants would hold onto their contributions to acquire their shares at the end of the period. Therefore, we have not provided any forfeiture provision for our ESPP for the six months purchase period starting November 1, 2005.
Restructuring
We have streamlined and restructured our operations from time to time in the past. Our restructuring expenses and accruals require significant estimates by management using the best information available at the time. These estimates include: facility exit costs,
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such as demise and lease termination costs; timing of future sublease occupancy; sublease income based on expected future market conditions; and other fees associated with our restructuring expenses, such as brokerage fees.
We evaluate a number of factors to determine the appropriateness and reasonableness of our restructuring accruals on a regular basis. Such factors include, but are not limited to, available market data, information from third party real estate brokers, and ongoing negotiations in order to estimate the likelihood, timing, lease terms and rates to be realized from potential subleases of restructured facilities held under operating leases. In addition, our restructuring estimates for facilities could be materially and adversely impacted by the financial condition of sub-lessees and changes in their ability to meet their financial obligations throughout the term of any sublease agreement. The impact of these estimated costs and sublease proceeds are significant factors in determining the appropriateness of our restructuring accrual balance presented in our Consolidated Balance Sheet at October 31, 2005. Our actual expenses may differ significantly from our estimates and as such, may require adjustments to our restructuring accruals, which will impact our operating results in future periods.
During the third quarter of fiscal 2005, we committed to and began implementing a restructuring program to realign our resources and refocus on our Versant Object Database product. As a result, we recorded total restructuring charges of $638,000 ($280,000 of which was related to severance costs) for the fiscal year ended October 31, 2005. Versant also recorded total restructuring charges of approximately $135,000 and $84,000 for the three months ended January 31, 2006 and April 30, 2006, respectively. With the completion of the sale of the assets associated with our WebSphere consulting practice, we have effectively completed the restructuring plan, which was initiated in June 2005.
The total quarterly cost savings attributable to this restructuring plan, excluding the effect of the VOA.NET spin-off, was approximately $400,000 for the quarter ended October 31, 2005, and is expected to increase to approximately $550,000 by the quarter ended July 31, 2006. These cost savings are related to completed headcount reduction as well as reduced discretionary spending.
Income Taxes
We estimate our income taxes in each of the jurisdictions in which we operate and account for income taxes payable as part of the preparation of our consolidated financial statements. This process involves estimating our actual current tax expense as well as assessing temporary differences resulting from differing treatment of items, such as depreciation and amortization, for financial and tax reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet to the extent deemed realizable. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and the extent we believe that recovery is not likely. We establish a valuation allowance against our net deferred tax assets to the extent such assets are not deemed to be realizable. If we establish a valuation allowance or increase it in a given period, then we must increase the tax provision in our statement of operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. Due to uncertainties related to our ability to utilize our deferred tax assets, we have established full valuation allowances at October 31, 2005 and April 30, 2006 for our deferred tax assets.
New Accounting Pronouncements
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion 20, Accounting Changes and SFAS 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and that corrections of previously issued financial statements should be termed a restatement. The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.
In June 2005, the Financial Accounting Standards Board ratified the consensus reached by the Emergency Issues Task Force (EITF) 05-05. This new standard addresses Altersteilzeit (ATZ) arrangements, an early retirement program in Germany designed to create an incentive for employees, within a certain age group, to transition from (full or part-time) employment into retirement
23
before their legal retirement age. The consensus in this Issue should be applied to fiscal years beginning after December 15, 2005. Adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.
Results of Operations
The following table sets forth, for the periods indicated, the percentage relationship of certain items from our condensed consolidated statement of operations to total revenues:
|
| Three Months Ended |
| Six Months Ended |
| ||||
|
| April 30, |
| April 30, |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
|
| (unaudited) |
| (unaudited) |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
License |
| 46 | % | 49 | % | 51 | % | 60 | % |
Maintenance |
| 39 |
| 48 |
| 37 |
| 37 |
|
Professional services |
| 15 |
| 3 |
| 12 |
| 3 |
|
Total revenues |
| 100 | % | 100 | % | 100 | % | 100 | % |
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
License |
| 1 |
| 2 |
| 2 |
| 1 |
|
Amortization of intangible assets |
| 2 |
| 6 |
| 2 |
| 5 |
|
Maintenance |
| 9 |
| 11 |
| 9 |
| 9 |
|
Professional services |
| 8 |
| 7 |
| 7 |
| 6 |
|
Total cost of revenues |
| 20 | % | 26 | % | 20 | % | 21 | % |
|
|
|
|
|
|
|
|
|
|
Gross profit margin |
| 80 | % | 74 | % | 80 | % | 79 | % |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Marketing and sales |
| 20 |
| 51 |
| 20 |
| 39 |
|
Research and development |
| 19 |
| 30 |
| 19 |
| 24 |
|
General and adminstrative |
| 23 |
| 38 |
| 23 |
| 30 |
|
Restructuring charges |
| 2 |
| -4 |
| 3 |
| -1 |
|
Total operating expenses |
| 64 | % | 115 | % | 65 | % | 92 | % |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
| 15 | % | -41 | % | 15 | % | -13 | % |
Outside shareholders' loss from VIE |
| 0 |
| 0 |
| 2 |
| 0 |
|
Other income, net |
| 1 |
| 4 |
| 1 |
| 2 |
|
Gain on the disposal of Variable Interest Entity |
| 3 |
| 0 |
| 2 |
| 0 |
|
Income (loss) from continuing operations before taxes |
| 19 | % | -37 | % | 20 | % | -11 | % |
Provision for income taxes |
| 3 |
| 1 |
| 2 |
| 1 |
|
Net income (loss) from continuing operations |
| 16 | % | -38 | % | 18 | % | -12 | % |
Gain from sale of discontinued operations, net of income taxes |
| 12 |
| 0 |
| 6 |
| 0 |
|
Earnings from discontinued operations, net of income taxes |
| 1 |
| 5 |
| 0 |
| 3 |
|
Net income (loss) |
| 29 | % | -33 | % | 24 | % | -9 | % |
Revenues
The following table summarizes software license, maintenance and professional services revenues for the three and six months ended April 30, 2006 (in thousands, except percentages):
|
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||||
|
| April 30, |
| April 30, |
| ||||||||||||||||||
|
|
|
|
|
| Change |
|
|
|
|
| Change |
| ||||||||||
|
| 2006 |
| 2005 |
| Amount |
| Percentage |
| 2006 |
| 2005 |
| Amount |
| Percentage |
| ||||||
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
License revenues |
| $ | 1,745 |
| $ | 1,575 |
| $ | 170 |
| 11 | % | $ | 4,258 |
| $ | 5,067 |
| $ | (809 | ) | -16 | % |
Maintenance revenues |
| 1,457 |
| 1,543 |
| (86 | ) | -6 | % | 3,090 |
| 3,135 |
| (45 | ) | -1 | % | ||||||
Professional services revenues |
| 578 |
| 92 |
| 486 |
| 527 | % | 1,057 |
| 290 |
| 767 |
| 265 | % | ||||||
Total |
| $ | 3,780 |
| $ | 3,210 |
| $ | 570 |
| 18 | % | $ | 8,405 |
| $ | 8,492 |
| $ | (87 | ) | -1 | % |
Total Revenues. Total revenues are comprised of license fees, maintenance, consulting, training and other support services. Fluctuations in total revenues can be attributed to changes in product and customer mix, general trends in information technology spending, as well as to changes in geographic mix and the corresponding impact of changes in foreign exchange rates. Further,
24
product life cycles impact revenues periodically as old contracts end and new products are released. Our revenues as shown in the above table and in the accompanying statements of operations included in this report do not include revenues from our disposed of WebSphere consulting practice. Instead, as required by generally accepted accounting principles, our financial statements report former WebSphere activities as “net income from discontinued operations, net of income taxes”, see Note 12 to the notes to Condensed Consolidated Financial Statements included in this report.
Our total revenues increased by $570,000 (or 18%) for the three months ended April 30, 2006 from the corresponding period in fiscal 2005. This increase included favorable foreign currency fluctuations of $12,000.
Our total revenues declined by $87,000 (or 1%) for the six months ended April 30, 2006 from the corresponding period in fiscal 2005. This decline included unfavorable foreign currency fluctuations of $37,000.
None of our customers accounted for more than 10% of our total revenues for the three and six months ended April 30, 2006, one customer accounted for 20% of our total revenues for the three month ended April 30, 2005, and two customers each accounted for 17% of our total revenues for the six months ended April 30, 2005.
Like many other enterprise software companies, we do not operate with a significant backlog of orders. Information Technology spending in general has not been very strong for the past few years, particularly in the U.S., which makes it even more difficult for us to forecast our revenues.
The inherently unpredictable business cycle of an enterprise software company and the cautious behavior of customers make discernment of continued and meaningful business trends even more difficult. However, with respect to license revenues, even though that we are still experiencing extremely cautious behaviors in IT purchasing in North America, we are projecting relatively the same amount of license revenues for the remainder of fiscal 2006 in the North America region compared to fiscal 2005. We, however, expect our international software license revenues to be higher for the remainder of fiscal 2006 compared to fiscal 2005 due to better performance of our European operation. We expect our maintenance revenues to remain at the same level for the remainder of fiscal 2006 compared to fiscal 2005. Further, we expect our consulting revenues to grow for the remainder of fiscal 2006 compared to fiscal 2005, due to to one ongoing consulting agreement with a European customer.
International Revenues. The following table summarizes our revenues by geographic area for the three and six months ended April 30, 2006 (in thousands, except percentages):
|
| Three Months Ended |
|
|
|
|
| Six Months Ended |
|
|
|
|
| ||||||||||||||||||
|
| April 30, |
|
|
|
|
| April 30, |
|
|
|
|
| ||||||||||||||||||
|
|
|
| Percentage |
|
|
| Percentage |
|
|
|
|
| Percentage |
|
|
| Percentage |
|
|
| ||||||||||
|
|
|
| of |
|
|
| of |
| Change |
|
|
| of |
|
|
| of |
| Change |
| ||||||||||
|
| 2006 |
| revenues |
| 2005 |
| revenues |
| Amount |
| Percentage |
| 2006 |
| revenues |
| 2005 |
| revenues |
| Amount |
| Percentage |
| ||||||
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||||||||||||
Revenues by geographic area: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
North America |
| $ | 1,110 |
| 30 | % | $ | 1,112 |
| 35 | % | $ | (2 | ) | 0 | % | $ | 2,445 |
| 30 | % | $ | 2,522 |
| 30 | % | $ | (77 | ) | -3 | % |
Europe |
| 2,566 |
| 68 | % | 1,897 |
| 59 | % | 669 |
| 35 | % | 5,753 |
| 68 | % | 5,722 |
| 67 | % | 31 |
| 1 | % | ||||||
Asia |
| 104 |
| 2 | % | 201 |
| 6 | % | (97 | ) | -48 | % | 207 |
| 2 | % | 248 |
| 3 | % | (41 | ) | -17 | % | ||||||
Total |
| $ | 3,780 |
| 100 | % | $ | 3,210 |
| 100 | % | $ | 570 |
| 18 | % | $ | 8,405 |
| 100 | % | $ | 8,492 |
| 100 | % | $ | (87 | ) | -1 | % |
International revenues represented approximately 70% of our total revenues for the three months ended April 30, 2006, as compared to 65% for the comparable period in 2005.
International revenues represented approximately 70% of our total revenues for the both six month periods ended April 30, 2006 and April 30, 2005.
The high percentage of international revenues for the periods presented is mainly due to the following:
· Stronger demand for our products in Europe.
· Cautious purchasing behavior and lack of execution of any major contract in the U.S.
· Change of management and reduction in sales personnel in our U.S. operations.
· Discontinuation of U.S. WebSphere consulting practice.
· Integration of the Poet products in Europe due to 2004 Poet merger.
25
Revenues by Industry. The following table summarizes our revenues by industry for the three and six months ended April 30, 2006 (in thousands, except percentages):
|
| Three Months Ended |
|
|
|
|
| Six Months Ended |
|
|
|
|
| ||||||||||
|
| April 30, |
|
|
|
|
| April 30, |
|
|
|
|
| ||||||||||
|
|
|
|
|
| Change |
|
|
|
|
| Change |
| ||||||||||
|
| 2006 |
| 2005 |
| Amount |
| Percentage |
| 2006 |
| 2005 |
| Amount |
| Percentage |
| ||||||
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||||
Revenues by industry: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Technology |
| $ | 1,602 |
| $ | 537 |
| $ | 1,065 |
| 198 | % | $ | 3,036 |
| $ | 2,033 |
| $ | 1,003 |
| 49 | % |
Telecommunications |
| 738 |
| 789 |
| (51 | ) | -6 | % | 2,017 |
| 2,561 |
| (544 | ) | -21 | % | ||||||
Defense (Inc Gov't) |
| 610 |
| 246 |
| 364 |
| 148 | % | 1,505 |
| 471 |
| 1,034 |
| 220 | % | ||||||
Other |
| 830 |
| 1,638 |
| (808 | ) | -49 | % | 1,847 |
| 3,427 |
| (1,580 | ) | -46 | % | ||||||
Total |
| $ | 3,780 |
| $ | 3,210 |
| $ | 570 |
| 18 | % | $ | 8,405 |
| $ | 8,492 |
| $ | (87 | ) | -1 | % |
Our products are used by the technology sector mainly for demand consensus forecasts, collaborative planning and requirements definition. Our revenues in this sector increased by $1 million (or 198%) to approximately $1.6 million during the three months ended April 30, 2006, compared to $538,000 for the corresponding period in fiscal 2005. Our revenues in the technology sector increased by $1 million (or 49%) to $3 million during the six months ended April 30, 2006, compared to $2 million for the corresponding period in fiscal 2005. This increase was mainly due to revenues from several European technology customers. In fiscal 2006, our European operation was able to close several deals in this sector that were delayed from fiscal 2005. We also had a significant percentage-of-completion consulting agreement with a technology company in Europe that contributed to this increase.
We also market our products to the telecommunications sector for such strategic distributed applications as network modeling and management, fault diagnosis, fraud prevention, service activation and assurance, and customer billing. Our revenues from the telecommunications sector decreased by $51,000 (or 6%) to $738,000 during the three months ended April 30, 2006, compared to $789,000 for the corresponding period of fiscal 2005. Our revenues from the telecommunications sector declined $544,000 (or 21%) to $2 million during the six months ended April 30, 2006, compared to $2.6 million for the corresponding period of fiscal 2005. This decline was due to the receipt of a significant follow on order from a European telecommunications company in the first quarter of fiscal 2005 for which there was no comparable transaction in the first quarter of fiscal 2006.
We also market our products to the defense sector for advanced simulation and intelligence analytics applications. Our revenues in this sector increased $364,000 (or 148%) to $610,000 during the three months ended April 30, 2006, compared to $246,000 for the corresponding period in fiscal 2005. Our revenues in this sector increased $1 million (or 220%) to $1.5 million during the six months ended April 30, 2006, compared to $471,000 for the corresponding period in fiscal 2005. This increase was mainly due to a major percentage-of-completion consulting agreement with a European customer for the three and six months ended April 30 2006.
Revenues by Category. The following table summarizes our revenues by category for the periods indicated (in thousands, except percentages):
|
| Three Months Ended |
|
|
|
|
| Six Months Ended |
|
|
|
|
| ||||||||||||||||||
|
| April 30, |
|
|
|
|
| April 30, |
|
|
|
|
| ||||||||||||||||||
|
|
|
| Percentage |
|
|
| Percentage |
|
|
|
|
|
|
| Percentage |
|
|
| Percentage |
|
|
|
|
| ||||||
|
|
|
| of |
|
|
| of |
| Changes |
|
|
| of |
|
|
| of |
| Changes |
| ||||||||||
|
| 2006 |
| revenues |
| 2005 |
| revenues |
| Amount |
| Percentage |
| 2006 |
| revenues |
| 2005 |
| revenues |
| Amount |
| Percentage |
| ||||||
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||||||||||||
Revenues by category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
License |
| $ | 1,745 |
| 46 | % | $ | 1,575 |
| 49 | % | $ | 170 |
| 11 | % | $ | 4,258 |
| 51 | % | $ | 5,067 |
| 60 | % | $ | (809 | ) | -16 | % |
Maintenance |
| 1,457 |
| 39 | % | 1,543 |
| 48 | % | (86 | ) | -6 | % | 3,090 |
| 37 | % | 3,135 |
| 36 | % | (45 | ) | -1 | % | ||||||
Professional service |
| 578 |
| 15 | % | 92 |
| 3 | % | 486 |
| 527 | % | 1,057 |
| 13 | % | 290 |
| 3 | % | 767 |
| 265 | % | ||||||
Total |
| $ | 3,780 |
| 100 | % | $ | 3,210 |
| 100 | % | $ | 570 |
| 18 | % | $ | 8,405 |
| 100 | % | $ | 8,492 |
| 100 | % | $ | (87 | ) | -1 | % |
License. License revenues were $1.7 million for the three months ended April 30, 2006, an increase of 11% from $1.6 million reported for the comparable period in fiscal 2005. The modestly higher license revenues during the three months ended April 30, 2006 was due to higher license revenues in Europe. We generally have experienced a higher demand for our products in Europe.
License revenues were $4.3 million for the six months ended April 30, 2006, a decline of 16% from $5.1 million reported for the comparable period in fiscal 2005. The higher license revenues during the six months ended April 30, 2005 was mainly due to a significant follow-on order from a European telecommunications company during the three months ended January 31, 2005. We did not have a comparable order during the three months ended January 31, 2006.
26
Maintenance. Maintenance revenues were $1.5 million for the three months ended April 30, 2006, which was generally consistent with the level of maintenance revenues reported for the comparable period in fiscal 2005. The maintenance revenues remained relatively unchanged due to a stable retention rate in our customer base.
Maintenance revenues were $3.1 million for the six months ended April 30, 2006, which was generally consistent with the maintenance revenues reported for the comparable period in 2005. The maintenance revenues remained relatively unchanged due to stable retention rate in our customer base
Professional Services. Professional services revenues were $578,000 for the three months ended April 30, 2006, an increase of 527% from $92,000 reported for the comparable period in fiscal 2005. Professional services revenues were $1.1 million for the six months ended April 30, 2006, an increase of 264% from $290,000 reported for the comparable period in fiscal 2005. These increase were mainly due to revenues associated with two major percentage-of-completion consulting agreements with two European customers for the six months ended April 30, 2006.
Cost of Revenues
The following table summarizes total cost of revenues for the three and six months ended April 30, 2005 and April 30, 2006 (in thousands, except percentages):
|
| Three Months Ended |
|
|
|
|
| Six Months Ended |
|
|
|
|
| ||||||||||
|
| April 30, |
|
|
|
|
| April 30, |
|
|
|
|
| ||||||||||
|
|
|
|
|
| Change |
|
|
|
|
| Change |
| ||||||||||
|
| 2006 |
| 2005 |
| Amount |
| Percentage |
| 2006 |
| 2005 |
| Amount |
| Percentage |
| ||||||
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||||
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of license |
| $ | 58 |
| $ | 55 |
| $ | 3 |
| 5 | % | $ | 162 |
| $ | 111 |
| $ | 51 |
| 46 | % |
Amortization of intangible assets |
| 79 |
| 200 |
| (121 | ) | -61 | % | 158 |
| 395 |
| (237 | ) | -60 | % | ||||||
Cost of maintenance |
| 345 |
| 360 |
| (15 | ) | -4 | % | 729 |
| 778 |
| (49 | ) | -6 | % | ||||||
Cost of professional services |
| 291 |
| 216 |
| 75 |
| 34 | % | 625 |
| 495 |
| 130 |
| 26 | % | ||||||
Total |
| $ | 773 |
| $ | 831 |
| $ | (58 | ) | -7 | % | $ | 1,674 |
| $ | 1,779 |
| $ | (105 | ) | -6 | % |
Total Cost of Revenues. Total cost of revenues was $773,000 for the three months ended April 30, 2006, a decline of $58,000 (or 7%) from the total cost of revenues of $831,000 reported for the comparable period in 2005. This decline included unfavorable foreign currency fluctuations of approximately $5,000.
Total cost of revenues was $1.7 million for the six months ended April 30, 2006, a decline of $105,000 (or 6%) from the total cost of revenues of $1.8 million reported for the comparable period in 2005. This decline included favorable foreign currency fluctuations of approximately $10,000.
License. Cost of license revenues consists primarily of royalties and cost of third party products (which we resell to our customers), product media and packaging costs.
Cost of license revenues was $58,000 for the three months ended April 30, 2006 (or 3% of license revenues) as compared to $55,000 (or 3% of license revenues) for the corresponding period in 2005.
Cost of license revenues was $162,000 for the six months ended April 30, 2006 (or 4% of license revenues) as compared to $111,000 (or 2% of license revenues) for the corresponding period in 2005.
The increase of $51,000 in absolute dollars for the six months ended April 30, 2006 over the comparable period in fiscal 2005 was primarily due to an increase in royalties and cost of third party products in U.S. for $30,000 and obsolescence of product documentation and media in Europe for $17,000.
Amortization of Intangible Assets. Amortization of intangible assets consists of the amortization of intangible assets acquired in our fiscal 2004 acquisitions of Poet Holdings, Inc., FastObjects, Inc. and JDO Genie technology.
Amortization of intangible assets was $79,000 for the three months ended April 30, 2006 (or 5% of license revenues) compared to $200,000 (or 13% of licensed revenues) for the corresponding period in fiscal 2005. The $121,000 (or 61%) decline in absolute
27
dollars for the three months ended April 30, 2006 from the comparable period in fiscal 2005, was due to several write-offs of our intangible assets for $2.6 million in fiscal 2005.
Amortization of intangible assets was $158,000 for the six months ended April 30, 2006 (or 4% of license revenues) as compared to $395,000 (or 8% of licensed revenues) for the corresponding period in 2005. The $237,000 (or 60%) decline in absolute dollars for the six months ended April 30, 2006 from the comparable period in 2005, was due to several write-offs of our intangible assets for $2.6 million, which occurred in fiscal 2005.
We expect to incur approximately $79,000 per quarter for amortization of intangible assets quarterly in fiscal 2006.
Maintenance. Cost of maintenance revenues consists primarily of customer support personnel and related expenses, including payroll, employee benefits and allocated overhead.
Cost of maintenance revenues was $345,000 for the three months ended April 30, 2006 (or 24% of maintenance revenues) compared to $360,000 (or 23% of maintenance revenues) for the corresponding period in fiscal 2005 as cost of maintenance in these periods continued essentially flat as a percentage of maintenance revenues. The decline in absolute dollars of $15,000 for the three months ended April 30, 2006, was mainly due to headcount reduction of three employees (resulting in a reduction in salary and related expenses offset by severance payments for $27,000 in our U.S. and U.K. operations) as a result of fiscal 2005 restructuring activities. This decline, however, was offset by a $17,000 increase in the cost of maintenance in our European operation due to an increase in consulting expenses.
Cost of maintenance revenues was $729,000 for the six months ended April 30, 2006 (or 24% of maintenance revenues) compared to $778,000 (or 25% of maintenance revenues) for the corresponding period in fiscal 2005 with cost of maintenance revenues remaining relatively consistent as a percentage of maintenance revenues in these periods. The decline in absolute dollars of $49,000 for the six months ended April 30, 2006, was mainly due to headcount reduction of three employees (resulting in a reduction in salary and related expenses offset by severance payments for $50,000 in our U.S. and U.K. operations) as a result of fiscal 2005 restructuring activities.
Professional Services. Cost of professional services consists of salaries, bonuses, third party consulting fees and other costs associated with supporting our professional services organization.
Cost of professional services revenues was $291,000 for the three months ended April 30, 2006 (or 51% of professional services revenues) compared to $216,000 (or 235% of the professional services revenues) for the corresponding period in fiscal 2005. The increase in absolute dollars of $75,000 was mainly due to two major percentage-of-completion consulting projects with two European customers during the three months ended April 30, 2006. The negative margin in professional services for the three months ended April 30, 2005 was due to under-utilization of one full-time employee dedicated to professional services during that quarter.
Cost of professional services revenues was $625,000 for the six months ended April 30, 2006 (or 59% of professional services revenues) compared to $495,000 (or 171% of the professional services revenues) for the corresponding period in fiscal 2005. The increase in absolute dollars of $130,000 was mainly due to two major percentage-of-completion consulting project with two European customers during the six months ended April 30, 2006. The negative margin in professional services for the six months ended April 30, 2005 was due to under-utilization of one full-time employee dedicated to professional services during that period.
In Europe, there is a statutory one-year warranty requirement for all our products and services. Prior to our merger with Poet in March 2004, Poet Holdings, Inc. provided for a reserve for such warranties that could be in excess of its regular maintenance programs. We continued maintaining this reserve for $8,000 and $18,000 related to the FastObjects products in Europe as of April 30, 2006 and 2005, respectively. Pursuant to our two consulting major percentage-of-completion engagements with two European customers, we maintained additional warranty reserves for $40,000 and $97,000 for the three and six months ended April 30, 2006, respectively.
Operating Expenses
The following table summarizes the operating expenses for the three and six months ended April 30, 2005 and April 30, 2006 (in thousands, except percentages):
|
| Three Months Ended |
|
|
|
|
| Six Months Ended |
|
|
|
|
| ||||||||||
|
| April 30, |
| Change |
| April 30, |
| Change |
| ||||||||||||||
|
| 2006 |
| 2005 |
| Amount |
| Percentage |
| 2006 |
| 2005 |
| Amount |
| Percentage |
| ||||||
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Sales and marketing |
| $ | 765 |
| $ | 1,630 |
| $ | (865 | ) | -53 | % | $ | 1,711 |
| $ | 3,350 |
| $ | (1,639 | ) | -49 | % |
Research and development |
| 702 |
| 955 |
| (253 | ) | -26 | % | 1,571 |
| 2,036 |
| (465 | ) | -23 | % | ||||||
General and administrative |
| 871 |
| 1,242 |
| (371 | ) | -30 | % | 1,924 |
| 2,559 |
| (635 | ) | -25 | % | ||||||
Restructuring charges |
| 84 |
| (122 | ) | 206 |
| -168 | % | 218 |
| (122 | ) | 340 |
| -279 | % | ||||||
Total |
| $ | 2,422 |
| $ | 3,705 |
| $ | (1,283 | ) | -35 | % | $ | 5,424 |
| $ | 7,823 |
| $ | (2,399 | ) | -31 | % |
28
Total Operating Expenses. Total operating expenses were $2.4 million for the three months ended April 30, 2006, a decline of 35% from $3.7 million reported for the comparable period in 2005. This decline included unfavorable foreign currency exchange fluctuations of $5,000.
Total operating expenses were $5.4 million for the six months ended April 30, 2006, a decline of 31% from $7.8 million reported for the comparable period in 2005. This decline included favorable foreign currency exchange fluctuations of $9,000.
Sales and Marketing. Sales and marketing expenses consist primarily of personnel and personnel related expenses, commissions earned by sales personnel, trade shows, travel and other marketing communication costs, such as advertising and other marketing programs.
Sales and marketing expenses were $765,000 for the three months ended April 30, 2006 (or 20% of revenues) and $1.6 million (or 51% of revenues) for the comparable period in fiscal 2005. The $865,000 decline in absolute dollar for the three months ended April 30, 2006 was mainly due to headcount reductions of ten in our U.S. operations (resulting in a reduction of $401,000) and headcount reduction of four in Europe (resulting in a reduction of $131,000). Additionally, the sales and marketing programs declined both in U.S. as well as Europe by approximately $240,000. Headcount reductions were the result of our fiscal 2005 restructuring activities to better align our costs with current revenue levels.
Sales and marketing expenses were $1.7 million for the six months ended April 30, 2006 (or 20% of revenues) and $3.4 million (or 40% of revenues) for the comparable period in fiscal 2005. The $1.7 million decline in absolute dollar for the six months ended April 30, 2006 were mainly due to headcount reductions of ten in our U.S. operations (resulting in a reduction of $735,000) and headcount reduction of four in Europe (resulting in a reduction of $363,000). Additionally, the sales and marketing programs also declined in both U.S. as well as Europe by approximately $420,000. Headcount reductions were the result of our fiscal 2005 restructuring activities to better align our costs with current revenue levels.
We expect sales and marketing expenses to be slightly higher for the remainder of fiscal 2006, compared to our last two quarters in fiscal 2006, due to two additional headcounts in our European operations, and it will continue to represent a considerable percentage of our total operating expenditures in the future.
Research and Development. Research and development expenses consist primarily of personnel and related expenses, including payroll and employee benefits expenses for facilities and payments made to outside software development contractors.
Research and development expenses were $702,000 (or 19% of revenues) for the three months ended April 30, 2006 and $955,000 (or 30% of revenues) for the comparable period in 2005. The $253,000 decline in absolute dollar for the three months ended April 30, 2006 was mainly due to headcount reductions of three in our U.S. operations (resulting in a reduction of $172,000), as a result of our fiscal 2005 restructuring activities. There was a decline of $50,000 in the research and development expenses in our Indian operation due to installation charges of laboratory research equipment, which occurred during the three months ended April 30, 2005, which we did not have any comparable expenditure during the three months ended April 30, 2006.
Research and development expenses were $1.6 million (or 19% of revenues) for the six months ended April 30, 2006 and $2.0 million (or 24% of revenues) for the comparable period in fiscal 2005. The $465,000 decline in absolute dollar for the six months ended April 30, 2006 was mainly due to headcount reductions of three in our U.S. operations (resulting in a reduction of $345,000) and a decline in temporary help and outside consultant expenses (resulting in a reduction of $162,000). These reductions were due to our fiscal 2005 restructuring activities. These declines, however, were partially offset by an increase in research and development expenses for $28,000 in our European operation for consulting expenses.
We anticipate that we will continue to invest significant resources in research and development activities to develop new products, advance the technology of our existing products and develop new business opportunities. We expect research and development expenditures to remain at the current levels for the remainder of fiscal 2006.
General and Administrative. General and administrative expenses consist primarily of personnel and related expenses and general operating expenses.
General and administrative expenses were $871,000 (or 23% of revenues) for the three months ended April 30, 2006 and $1.2 million (or 39% of revenues) for the comparable period in fiscal 2005. The $371,000 decline in absolute dollar for the three months ended April 30, 2006 was mainly due to headcount reductions of three in our U.S. operations (resulting in a reduction of
29
$99,000) because of our fiscal 2005 restructuring activities. Legal expenses declined by $106,000 due to a legal settlement and fewer numbers of complex regulatory issues during the quarter. Additionally, accounting and SEC filing related expenses declined by $197,000 due to more streamlined operations and procedures. These declines were offset by an approximately $64,000 increase in salary and traveling expenses in our European operation.
General and administrative expenses were $1.9 million (or 23% of revenues) for the six months ended April 30, 2006 and $2.6 million (or 31% of revenues) for the comparable period in 2005. The $635,000 decline in absolute dollar for the six months ended April 30, 2006 was mainly due to headcount reductions of three in the U.S. operation (resulting in a reduction of $267,000) due to our fiscal 2005 restructuring activities. Legal expenses declined by $142,000 related to the settlement of a legal matter and fewer numbers of complex regulatory issues during the first six months of the fiscal year. Additionally, accounting and SEC filing related expenses declined by $253,000 due to more streamlined operations and procedures. These declines were offset by an approximately $88,000 increase in salary and traveling expenses in our European operation.
We expect our general and administrative expenses to increase modestly towards the end of fiscal year 2006 if we are required to comply with Section 404 of Sarbanes-Oxley Act of 2002 by the end of fiscal 2007.
Outside Shareholders’ Loss from VIE
During the three months ended July 31, 2005, as part of our restructuring plan, we spun-off the assets of our VOA.Net product to Vanatec, and we committed to the capital contribution of an additional 212,500 euros (or $260,000), which we fully contributed on November 3, 2005. We determined that equity at risk in Vanatec was not sufficient to permit it to finance its activities without additional subordinated financial support; therefore, we considered Vanatec a variable interest entity in accordance with FIN 46(R), Consolidation of Variable Interest Entities (As Amended).
Vanatec’s results have been included in our consolidated financial statements for the three month periods ended July 31, 2005, October 31, 2005 and January 31, 2006 and through March 27, 2006. During the three months ended January 31, 2006, we absorbed our share of Vanatec’s losses up to the point that it exceeded variable interest liability; and subsequent to that we absorbed 100% of the losses that Vanatec has incurred for an additional amount of $35,000 for the three months ended January 31, 2006.
On March 27, 2006, we sold our 19.6% interest in Vanatec to a third party investor for 4,900 euros and entered into a joint ownership agreement with Vanatec with respect to certain technology we had previously licensed to Vanatec. According to this agreement, Vanatec is obligated to pay Versant a running royalty interest at a rate of six percent of its net proceeds, but no less than 30 euros per copy of licenses it grants of the co-owned technology, for a period of five years following the effective date of this agreement. Further, at any time during the royalty period, Vanatec has the right to exercise a buyout for its royalty obligations by making a one-time payment to Versant of 450,000 euros. As a result of Versant’s sale of its interest in Vanatec and this agreement, Versant determined that it is no longer the primary beneficiary of Vanatec as defined by FIN 46 (R), and thus, is no longer required to consolidate Vanatec’s operating results. Nevertheless, we continued to absorb 100% of Vanatec’s losses for an additional amount of $70,000 for the period between February 1, 2006 and March 27, 2006. We are not required to consolidate the operating results of Vanatec as of March 27, 2006.
Other Income, Net
Other income, net also consists of interest income net of interest expense, miscellaneous refunds and foreign exchange rate gains and losses.
The following table summarizes the other income, net for the three and six months ended April 30, 2006 (in thousands, except percentages):
|
| Three Months Ended |
|
|
|
|
| Six Months Ended |
|
|
|
|
| ||||||||||
|
| April 30, |
| Change |
| April 30, |
| Change |
| ||||||||||||||
|
| 2006 |
| 2005 |
| Amount |
| Percentage |
| 2006 |
| 2005 |
| Amount |
| Percentage |
| ||||||
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||||
Interest income |
| $ | 18 |
| $ | 22 |
| $ | (4 | ) | -18 | % | $ | 47 |
| $ | 35 |
| $ | 12 |
| 34 | % |
Interest expense |
| 1 |
| (1 | ) | 2 |
| -200 | % | (2 | ) | (2 | ) | — |
| 0 | % | ||||||
Other income |
| — |
| — |
| — |
| — |
| — |
| 14 |
| (14 | ) | -100 | % | ||||||
Foreign exchange gain |
| 15 |
| 101 |
| (86 | ) | -85 | % | 1 |
| 156 |
| (155 | ) | -99 | % | ||||||
Other income, net |
| $ | 34 |
| $ | 122 |
| $ | (88 | ) | -72 | % | $ | 46 |
| $ | 203 |
| $ | (157 | ) | -77 | % |
30
Other income, net was $34,000 (or 1% of revenues) for the three months ended April 30, 2006 and $122,000 (or 4% of revenues) for the comparable period in 2005. The decrease in absolute dollars of $88,000 was largely due to foreign exchange rate fluctuations.
Other income, net was $46,000 (or 1% of revenues) for the six months ended April 30, 2006 and $203,000 (or 2% of revenues) for the comparable period in 2005. The decrease in absolute dollars of $157,000 was largely due to foreign exchange rate fluctuations.
Gain on Disposal of VIE
We are no longer required to consolidate the operating results of Vanatec as of March 28, 2006; therefore, we recorded a gain of $131,000 related to the deconsolidation of Vanatec during the three months ended April 30, 2006. This amount is comprised of the reversal of the excess losses that we had absorbed previously for $105,000, and the consideration that we received from a third party investor in lieu of our interest at Vanatec for $6,000, transfer of property and equipment for $17,000; other comprehensive income for $6,000; and offset by foreign currency losses of $3,000.
Provision for Income Taxes
The following table reflects provision for income taxes for the three and six months ended April 30, 2006 and April 30, 2005 (in thousands):
|
| Three Months Ended |
|
|
|
|
| Six Months Ended |
|
|
|
|
| ||||||||||
|
| April 30, |
| Change |
| April 30, |
| Change |
| ||||||||||||||
|
| 2006 |
| 2005 |
| Amount |
| Percentage |
| 2006 |
| 2005 |
| Amount |
| Percentage |
| ||||||
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||||
Foreign withholding taxes |
| $ | — |
| $ | 16 |
| $ | (16 | ) | -100 | % | $ | — |
| $ | 16 |
| $ | (16 | ) | -100 | % |
Provision for income taxes Germany |
| 45 |
| — |
| 45 |
| 100 | % | 116 |
| — |
| 116 |
| 100 | % | ||||||
Provision for income taxes UK |
| 36 |
| — |
| 36 |
| 100 | % | 36 |
| — |
| 36 |
| 100 | % | ||||||
US state and franchise taxes |
| 18 |
| 5 |
| 13 |
| 200 | % | 30 |
| 51 |
| (21 | ) | -41 | % | ||||||
Total |
| $ | 99 |
| $ | 21 |
| $ | 78 |
| 367 | % | $ | 182 |
| $ | 67 |
| $ | 115 |
| 172 | % |
We accrued income taxes for our European operation since there is a statutory limitation on the net operating loss utilization per fiscal year in Germany and we expect to exceed this limit in fiscal 2006. Further, we have already exhausted our net operating loss carry forward in our U.K. operation.
We record a valuation allowance to reduce our tax assets to an amount for which realization is more likely than not. We have recorded a valuation allowance for all of our deferred tax assets as of April 30, 2006, except to the extent of deferred tax liabilities, as we are presently unable to conclude that it is more likely than not that the existing net deferred tax assets will be realized.
LIQUIDITY AND CAPITAL RESOURCES
We funded our business from cash generated by our operations during the six months ended April 30, 2006. As of April 30, 2006, we had a cash and cash equivalents balance of approximately $5.9 million, an increase of $1.6 million over the $4.3 million of cash and cash equivalents we held at April 30, 2005. As of April 30, 2006, $5.5 million of our cash and cash equivalents were held in foreign financial institutions. Currently, there are no legal restrictions or tax penalties if we decide to repatriate this cash.
The following table summarizes our cash balances held in foreign currencies and their equivalent U.S. dollar amounts for the periods indicated (in thousands):
31
|
| As of April 30, 2006 |
| As of April 30, 2005 |
| ||||||
|
| Local Currency |
| U.S. Dollar |
| Local Currency |
| U.S. Dollar |
| ||
|
| (unaudited) |
|
|
|
|
| ||||
Cash in foreign currency: |
|
|
|
|
|
|
|
|
| ||
Euros |
| 2,232 |
| $ | 2,821 |
| 1,744 |
| $ | 2,246 |
|
British Pound |
| 749 |
| 1,369 |
| 350 |
| 667 |
| ||
India Rupee |
| 2,310 |
| 52 |
| 2,482 |
| 57 |
| ||
Total |
|
|
| $ | 4,242 |
|
|
| $ | 2,970 |
|
We transact business in various foreign currencies and, accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. To date, the effect of changes in foreign currency exchange rates on our net operating results has not been significant. Operating expenses incurred by our foreign subsidiaries are denominated primarily in local currencies. We currently do not use financial instruments to hedge these operating expenses. We intend to assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis during the remainder of fiscal 2006.
Our exposure to foreign exchange risk is related to the magnitude of foreign net profits and losses denominated in euros and Pound Sterling, as well as our net position of monetary assets and monetary liabilities in those foreign currencies. These exposures have the potential to produce either gains or losses within our consolidated results. Our European operations, however, in some instances act as a natural hedge since both operating expenses as well as revenues are denominated in local currencies. In these instances, although an unfavorable change in the exchange rate of euros or Pound Sterling against the U.S. dollar will result in lower revenues when translated into U.S. dollars, the operating expenditures will be lower as well. Additionally, since most of our cash resides outside the United States, we have maintained approximately 32% of our cash balance in Europe in the form of U.S. dollars to neutralize the impact of any foreign currency fluctuations.
We do not use derivative financial instruments for speculative trading purposes.
Our cash equivalents primarily consist of money market accounts; accordingly, our interest rate risk is not considered significant.
Our largest source of operating cash flows is cash collections from our customers due to purchase of our products and services. Our primary uses of cash in operating activities are for personnel related expenditures and facilities costs.
We believe that with our current cost structure, after the completion of our restructuring and disposition of our WebSphere business, we can operate on a cash flow positive or breakeven position for the next twelve months.
Operating Activities
The following table aggregates certain line items from the cash flow statement to present the key items affecting our operating activities for the periods indicated (in thousands):
|
| Six Months Ended |
|
|
|
|
| |||||
|
| April 30, |
| Change |
| |||||||
|
| 2006 |
| 2005 |
| Amount |
| Percentage |
| |||
|
| (unaudited) |
| |||||||||
Net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 1,930 |
| $ | (714 | ) | $ | 2,644 |
| -370 | % |
Gains from the disposal of assets |
| (599 | ) | — |
| (599 | ) | — |
| |||
Non-cash adjustments |
| 234 |
| 448 |
| (214 | ) | -48 | % | |||
Accounts receivable |
| 1,248 |
| 2,313 |
| (1,065 | ) | -46 | % | |||
Prepaid expense and other assets |
| (256 | ) | 329 |
| (585 | ) | -178 | % | |||
Accounts payable, accrued liabilities and other liabilities |
| (1,347 | ) | (1,850 | ) | 503 |
| -27 | % | |||
Deferred revenues |
| 216 |
| 311 |
| (95 | ) | -31 | % | |||
Total |
| $ | 1,426 |
| $ | 837 |
| $ | 589 |
| 70 | % |
We have financed our operations and met our capital expenditure requirements through cash flows from operations, and increased our cash flows from operations to $1.4 million for the six months ended April 30, 2006, up from $837,000 for the six months ended April 30, 2005. This increase is attributed mainly due to our higher net income for the six months ended April 30, 2006.
32
Non-cash adjustments were $234,000 for the six months ended April 30, 2006 compared to $448,000 for the corresponding period in 2005 due to write offs related to our intangible assets for $2.6 during the third quarter of fiscal 2005. Non-cash adjustments may increase or decrease in the future and, as a result, positively or negatively impact our future operating results, but they will not have a direct impact on our cash flows.
The timing of payments to our vendors for accounts payable and collections from our customers for accounts receivable will impact our cash flows from operating activities. We typically pay our vendors and service providers in accordance with their invoice terms and conditions. Our standard payment terms for our invoices are usually between 30 and 60 days net.
We measure the effectiveness of our collection efforts by an analysis of our accounts receivable and our days sales outstanding (DSO). We calculate DSO by taking the ending accounts receivable balances (net of bad debt allowance) divided by the average daily sales amount. Average daily sales amount is calculated by dividing the total quarterly revenue recognized net of changes in deferred revenues divided by 91.25 days. Collection of accounts receivable and related DSO could fluctuate in the future periods, due to timing and amount of our revenues and the effectiveness of our collection efforts. Our DSOs were 38 days and 60 days for the three months ended April 30, 2006 and April 30, 2005, respectively. The lower DSO for the quarter ended April 30, 2006 was mainly due to better collection procedures as well as discontinuation of our former WebSphere operation, which typically had accounts receivable with higher than average DSOs.
Our working capital was $2.7 million as of April 30, 2006 compared to $1.5 million for the corresponding period in fiscal 2005.
The analyses of the changes in our working capital are as follows:
· Deferred revenues increased to $216,000 in the six months ended April 30, 2006 as a result of an increase of $244,000 in the deferred revenues of our European operation, due to higher software maintenance revenue contracts and deferred revenues related to a percentage-of-completion consulting agreement. The increase was partially offset by $27,000 decline in deferred revenues in our U.S. operation due to delay in renewal of several maintenance contracts.
· Accounts payable and other accrued liabilities declined to $1.3 million primarily due to decrease in liabilities related to discontinuation of WebSphere consulting of $464,000, a decrease in restructuring accrual due to facility-related payments made against it of $168,000, a decrease in legal expenses accrual due to lower legal expenses of $300,000, and a decrease in commissions and bonus and related accruals due to lower sales headcount of $268,000.
· Accounts receivable declined to $1.2 million due to the discontinuation of our WebSphere consulting practice and lower DSO in the period.
Investing Activities
The primary use of our cash in investing activities is typically for the acquisition of property and equipment.
For the six months ended April 30, 2006, net cash provided by investing activities was approximately $441,000, comprised of the following:
· Cash received of $500,000 from the sale of assets of our WebSphere consulting practice.
· Cash used for the acquisition of property and equipment for $65,000.
Financing Activities
The primary source of cash from financing activities is proceeds from sale of common stock under our Equity Incentive Plan, Directors Stock Option Plan and Employee Stock Purchase Plan.
For the six months ended April 30, 2006, net cash used in financing activities was approximately $4,000, comprised of the following:
33
· Cash receipts for $38,000 related to the proceeds for the sale of common stock under our equity incentive plan and our employee stock purchase plan.
· Cash payments of $39,000 for the repayment of the borrowing under our the line of credit.
Our future liquidity and capital resources could be impacted by the exercise of outstanding common stock options and the cash proceeds we receive upon exercise of these securities. Further, we have approximately 341,000 shares available to issue under our current equity incentive and directors plans. The timing of the issuance, the duration of their vesting provision and the grant price will all impact the timing of any proceeds.
Commitments and Contingencies
Our principal commitments as of April 30, 2006 consist of obligations under operating leases for facilities, equipments and contract commitments.
Our annual minimum commitments as of April 30, 2006 under non-cancelable operating leases, not recorded on our Consolidated Balance Sheet as of April 30, 2006, are as follows (in thousands):
| Rental |
| Equipment |
|
|
| ||||
|
| Leases |
| Leases |
| Total |
| |||
Six months ending October 31, 2006 |
| $ | 793 |
| $ | 48 |
| $ | 841 |
|
Fiscal year ending October 31, |
|
|
|
|
|
|
| |||
2007 |
| 1,050 |
| 58 |
| 1,108 |
| |||
2008 |
| 88 |
| 43 |
| 131 |
| |||
2009 |
| — |
| 34 |
| 34 |
| |||
2010 |
| — |
| 16 |
| 16 |
| |||
Thereafter |
| — |
| 22 |
| 22 |
| |||
Total |
| $ | 1,931 |
| $ | 221 |
| $ | 2,152 |
|
On June 21, 2005, we entered into a Loan and Security Agreement with a financial institution, a Streamline Facility Agreement and an Intellectual Property Security Agreement (collectively, the “Loan Agreements”). Under the terms of these Loan Agreements, we may borrow up to a maximum of $3.0 million from the bank at any one time under a revolving secured accounts receivable-based line of credit. This line of credit permits us to obtain short-term loan advances from the financial institution equal to 80% of the face amount of our specific eligible accounts receivable. The interest rate on each advance will be either 4.0% or 4.5% above the bank’s prime rate. Our obligations to the financial institution under the Loan Agreements are secured by a first security interest in all of our assets, including our equipment, cash and intellectual property. The credit facility provided by the Loan Agreements will expire by June 21, 2007.
We believe that our existing cash and cash equivalents and cash to be generated from operations will be sufficient to finance our operations during the next twelve months. However, if we fail to generate adequate cash flows from operations in the future, due to an unexpected decline in our revenues, or due to a sustained increase in cash expenditures in excess of the revenues generated; then our cash balances may not be sufficient to fund our continuing operations without obtaining additional debt or equity financing. Additional cash may also be needed to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies, and we expect that, in the event of such an acquisition or investment, if significant, it will be necessary for us to seek additional debt or equity financing.
If we are required to obtain additional financing for our working capital, there can be no assurance that such financing will be available to us on reasonable financial or other terms, or at all. The prices at which new investors might be willing to purchase our securities may be lower than the market value or the trading price of our common stock. The sale of additional equity or convertible debt securities could also result in dilution to our shareholders, which could be substantial and may involve the issuance of preferred securities that would have liquidation preferences that entitle holders of the preferred securities to receive certain amounts before holders of our common stock in connection with an acquisition or business combination involving Versant
34
or a liquidation of Versant. New investors may also seek agreements giving them additional voting control or seats on our board of directors.
Further, if our common stock were ever delisted from trading on the NASDAQ Capital Market, our ability to obtain financing through sales of our stock would be materially impaired. Even if we were able to obtain additional debt or equity financing, the terms of any such financing might significantly restrict our business activities and in some circumstances, might require us to obtain the approval of our shareholders, which could delay or prevent consummation of the financing transaction.
In order to be able to comply with the NASDAQ Capital Market’s continued listing requirements regarding the minimum bid price of our common stock, at our annual meeting of shareholders held on August 22, 2005, our shareholders approved an amendment of our articles of incorporation to effect a 1-for-10 reverse split of our outstanding Common Stock, and to reduce the number of authorized shares of our Common Stock, Series A Preferred Stock and undesignated Preferred Stock in proportion to the ratio of the reverse split. Subsequent to the reverse split, on September 8, 2005, we received notice from NASDAQ market that we regained compliance with NASDAQ’s minimum bid price requirement.
Risk Factors
This quarterly report on Form 10-Q contains forward-looking statements regarding the Company that involve risks and uncertainties, including, but not limited to, those set forth below, that could cause our actual results of operations to differ materially from those contemplated in the forward-looking statements. The matters set forth below should be carefully considered carefully considered when evaluating our business and prospects.
Risks Related to Our Business
We are dependent on a limited number of products, especially Versant Object Database. Nearly all of our license revenues to date have been derived from our Versant Object Database product and its predecessors. Consequently, if our ability to generate revenues from Versant Object Database were negatively impacted, our business, cash flows and results of operations would be materially adversely affected. Many factors could negatively impact our ability to generate revenues from Versant Object Database, including without limitation softness in the North American market for enterprise software, consumer demand changes in the European market for enterprise software, slowness in the general economy or in key industries we serve, such as the technology, telecommunications and defense industries, the success of competitive products of other vendors, reduction in the prices we can obtain for our products due to competitive factors, the adoption of new technologies or standards that make our products technologically obsolete or customer reluctance to invest in object-oriented technologies. Although we have taken steps to diversify our product line through our acquisition of Poet and its FastObjects data management product, we still expect that sales of Versant Object Database will continue to be critical to our revenues for the foreseeable future. Accordingly, any significant reduction in revenue levels from our Versant Object Database product can be expected to have a material negative impact on our business and results of operation.
Our revenue levels are not predictable. Our revenues have fluctuated dramatically on a quarterly basis, and we expect this trend to continue. For example, in fiscal 2005 our quarterly revenues fluctuated from a high of $5.3 million in the first quarter of fiscal 2005 to a low of $3.2 million in the second quarter of fiscal 2005. In the first quarter of 2006 our revenue was $4.6 million and in the second quarter of 2006 was $3.8 million. These quarterly fluctuations result from a number of factors, including the following items:
· delays by our customers (including customers who are resellers) in signing revenue-bearing contracts that were expected to be entered into in a particular fiscal quarter and the timing of any significant sales;
· the status of the market for enterprise software and general macroeconomic factors that impact information technology, or “IT”, capital purchasing decisions;
· the lengthy sales cycle associated with our products;
· the extent to which we do or do not complete tasks under consulting projects which must be completed in order for us to recognize certain revenues under such contracts;
· customer and market perceptions of the value and currency of object-oriented software technology;
· uncertainty regarding the timing and scope of customer deployment schedules of applications based on Versant Object Database where revenues are contingent upon the customer’s deployment of our product;
· failure by us to timely develop and launch successful new products;
35
· fluctuations in domestic and foreign demand for our products and services, particularly in the telecommunications, technology and defense markets;
· the impact of new product introductions, both by us and by our competitors;
· our unwillingness to lower prices significantly to meet prices set by our competitors or reductions of our prices to meet competition;
· the effect of publications of opinions about us and our competitors and their products;
· customer deferrals of orders in anticipation of product enhancements or new product offerings by us or our competitors;
· potential customers’ unwillingness to invest in our products given our size and perceived financial instability.
We may not be able to manage costs effectively given the unpredictability of our revenues. We expect to continue to maintain a relatively high percentage of fixed expenses, and particularly inasmuch as we have completed a restructuring to significantly reduce our operating expenses. We might be unable to further reduce certain fixed expenses to accommodate any revenue reductions. If forecast revenue does not materialize, then our business, financial condition and results of operations will be materially harmed.
Our customer concentration increases the potential volatility of our operating results. A significant portion of our total revenues has been, and we believe will continue to be, derived from a limited number of orders placed by large organizations. For example, one customer contributed 20% of our total revenues for the second quarter 2005. The timing of large orders and of their fulfillment has caused, and in the future is likely to cause, material fluctuations in our operating results, particularly on a quarterly basis. In addition, our major customers tend to change from year to year. The loss of any one or more of our major customers, or our inability to replace a customer making declining purchases with a new customer of comparable significance, could each have a material adverse effect on our business.
Our future revenues are substantially dependent upon our installed customers renewing maintenance agreements for our products and licensing or upgrading additional Versant products; our future professional services and maintenance revenues are dependent on future sales of our software products. We depend on our installed customer base for future revenues from maintenance renewal fees, licenses of additional products or upgrades of existing products. If our customers do not purchase additional products, upgrade existing products or renew their maintenance agreements, this could materially adversely affect our business and future quarterly and annual operating results. The terms of our standard license arrangements provide for a one-time license fee and a prepayment of one year of software maintenance and support fees. Our maintenance agreements are renewable annually at the option of the customer and there are no minimum payment obligations or obligations to license additional software. Therefore, our current customers may not necessarily generate significant maintenance revenues in future periods if they choose not to renew our maintenance services. This risk may be increased in the case of long-term customers who have not upgraded our products, which they license. In addition, our customers may choose not to purchase additional products, upgrades or professional services. Our professional services and maintenance revenues are also dependent upon the continued use of our products by our installed customer base. Consequently, any downturn in our software license revenues would likely have a corresponding negative impact on the growth of our professional service revenues.
We have limited working capital and may experience difficulty in obtaining needed funding, which may limit our ability to effectively pursue our business strategies. At April 30, 2006, we had approximately $5.9 million in cash and cash equivalents and working capital of approximately $2.7 million. To date, we have not achieved profitability or generated positive cash flows on a sustained basis. In response to this situation, in the fourth quarter of fiscal 2004 and the third quarter of fiscal 2005, we restructured our business operations to reduce our operating expenses by streamlining our operating processes. These restructuring efforts continued into the fourth quarter of fiscal 2005 and has completed in the second quarter of fiscal 2006. Although with such restructuring, we believe that our current cash, cash equivalents, and any net cash provided by operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next twelve months, we may choose to make further cost reductions and it is possible that events may occur that could render our current working capital reserves insufficient. Because our revenues are unpredictable and a significant portion of our expenses is fixed (and more difficult to reduce further given previous cost reductions), a reduction in our projected revenues or unanticipated requirements for cash outlays could deplete our limited financial resources and working capital. Impairment of our working capital would require us to make expense reductions and/or to raise funds through borrowing or debt or equity financing. There can be no assurance that any equity or debt funding will be available to us on favorable terms, if at all. If we cannot secure adequate financing sources when required, then we would need to further reduce our operating expenses, which would restrict our ability to pursue our business objectives.
Reduced demand for our products and services may prevent us from achieving targeted revenues and profitability. Our revenues and our ability to achieve and sustain profitability depend on the overall demand for the software products and services we offer.
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Reduced demand for our product line may result from competition offered by alternative technologies or negative customer perception of our object-oriented technology. General economic conditions can also have a significant adverse effect on our revenues and results of operations. The demand for IT market infrastructure, the market sector that we serve, has not fully recovered since the economic slow down of the early 2000s. We cannot predict the impact of these or similar events in the future, or of any related 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 on information technology. In addition, we have experienced continued hesitancy on the part of our existing and potential customers to commit to new products or services from us, particularly in our North American markets. If U.S. or global economic conditions takes another downturn, this revenue impact may worsen as well and have a material adverse impact on our business, operating results and financial condition.
We rely for revenues on the technology, telecommunications, defense industries, and these industries are characterized by complexity, intense competition and changes in purchasing cycles. Historically, we have been highly dependent upon the telecommunications industry and, more recently, we are becoming increasingly dependent upon the technology, telecommunications and defense industries for sales of Versant Object Database. Our success in these areas is dependent, to a large extent, on general economic conditions affecting these industries, our ability to compete with alternative technology providers, our ability to develop products that can successfully interoperate in different computing environments and whether our customers and potential customers believe we have the expertise and financial stability necessary to provide effective solutions in these markets on an ongoing basis. If these conditions, among others, are not satisfied, we may not be successful in generating additional opportunities in these markets. Currently, companies in these industries are hesitant to commit to additional technology expenditures and the telecommunications industry has in particular experienced significant economic difficulties and consolidation trends in recent years, which could jeopardize our ability to continue to derive revenues from customers in that industry. The technology industry has also generally experienced volatility in recent years that may adversely affect demand for our products and services from that industry and the defense industry may experience new cycles of lower available technology budgets due to high levels of U.S. defense spending for operations in Iraq and Afghanistan. In addition, the types of applications and commercial products for the technology, telecommunications and defense markets are continuing to develop and are rapidly changing, and these markets are characterized by an increasing number of new entrants whose products may compete with ours. As a result, we cannot predict the future growth of (or whether there will be future growth in) these markets, and demand for object-oriented databases applications in these markets may not develop or be sustainable. We also may not be successful in attaining a significant share of these markets due to competition and other factors, such as our limited working capital. Moreover, potential customers in these markets generally develop sophisticated and complex applications that require substantial consulting expertise to implement and optimize. There can be no assurance that we can hire and retain adequate personnel for this practice.
We depend increasingly on our international operations for our revenues as North American revenues have declined. A large and increasing portion of our revenues is derived from customers located outside North America, and it is critical for us to maintain our international revenues. Following our acquisition of Poet, which had a strong European presence, international revenues have represented a larger percentage of our total revenues than it had historically and consequently we must conduct our operations internationally and maintain a significant presence in international markets. For the three and six months ended April 30, 2006, our international revenues derived from customers outside North America made up approximately both 70% of our total revenues, compared to 65% and 70% of total revenues for the comparable periods in fiscal 2005, respectively. North American revenues for three and six months ended April 30, 2006 were $1.1 million and $2.4 million, respectively, compared to $1.1 million and $2.5 million, for the comparable period in fiscal 2005, respectively. We believe that these reductions in our North American revenues are due largely to cautious purchasing behavior for the past few years as well as the impact of changes in our sales management and organization. During that period European revenues grew significantly, primarily due to our merger with Poet, although revenues from our core data management products also grew in this region. It is possible that the North America revenues will continue to remain depressed for the remainder of fiscal 2006, making the international revenues even more critical to our operations and cash flows.
In fiscal 2002, we transitioned some of our international sales efforts to a business model that employs local distributors. While use of local distributors reduces certain sales and operating expenses, it also makes our business more dependent on the skills and efforts of third parties and can decrease our profit margins.
Our international operations are subject to a number of unique risks in addition to the risks faced by our domestic operations. These risks include, but are not limited to the following areas:
· longer receivable collection periods;
· adverse changes in regulatory requirements;
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· dependence on independent resellers;
· fluctuations in foreign exchange rates;
· compliance with multiple and conflicting regulations and technology standards in different jurisdictions;
· import and export restrictions, tariffs and other regulatory restrictions;
· difficulties in, and increased costs of, staffing and managing foreign operations;
· potentially adverse tax consequences arising from international operations and inter-company transactions;
· the burdens of complying with a variety of foreign laws, including more protective employment laws in Germany;
· the impact of business cycles, economic and political instability and potential hostilities outside the United States; and
· limited ability to enforce agreements, intellectual property rights and other rights in some foreign countries.
In addition, in light of increasing global security and terrorism, there may be additional risks of disruption to our international sales activities. Any prolonged disruption in the markets in which we derive significant revenues may potentially have a material adverse impact on our revenues and results of operations.
In order to be successful, Versant must attract, retain and motivate key employees and failure to do so could seriously harm the Company. In order to be successful, we must attract, retain and motivate our executives and other key employees, including those in managerial, sales and technical positions. We reduced our workforce in connection with a restructuring of our operations in the fourth quarter of fiscal 2004 and the third quarter of fiscal 2005. These and other circumstances may adversely affect our ability to attract and retain key management. We must continue to motivate employees and keep them focused on the achievement of our strategies and goals. In addition, as a result of our merger with Poet in March of 2004, we now employ a sizable German workforce subject to German law, which generally provides greater financial protection to terminated employees than does United States law. Consequently, failure to retain our German employees may cause us to incur significant severance costs, which could adversely affect our operating results and financial condition.
Our personnel, management team and operations are located in different countries and as a result, we may experience difficulty in coordinating our activities and successfully implementing Company goals. Following our 2004 merger with Poet, we acquired significant operations and personnel in Europe, and now have approximately 31 employees based in Europe whose activities must be well coordinated with those of our U.S. workforce and other employees. In addition, we also perform a significant amount of engineering work in India through our wholly owned subsidiary located in Pune, India. We currently employ about 35 employees in India, which represents approximately 41% of our total workforce. As a result of the Poet merger and recent management changes, our management team resides in both our U.S. headquarters in Fremont, California and our office in Hamburg, Germany and our Chief Executive Officer resides in Hamburg, Germany. The significant geographic dispersion of our management team and our workforce may make it more difficult for us to successfully manage our long-term objectives, coordinate activity across the Company, and integrate our operations and business plans.
Our products have a lengthy sales cycle. The sales cycle for our Versant Object Database and FastObjects products varies substantially from customer to customer, and often exceeds nine months and can sometimes extend to a year or more, especially for sales to defense sector customers. Due in part to the strategic nature of our products and the expenditures associated with their purchase, potential customers are typically cautious in making decisions to acquire our products. Influencing our customers’ decision to license our products generally requires us to provide a significant level of education to prospective customers regarding the uses and benefits of our products, and we frequently commit to provide that education without any charge or reimbursement. Generally, pre-sales support efforts, such as assistance in performing benchmarking and application prototype development, are also conducted with no charge to customers. Because of the lengthy sales cycle for our products and the relatively large average dollar size of individual licenses, a lost or delayed sales transaction could potentially have a significant impact on our operating results for a particular fiscal period.
We are subject to litigation and the risk of future litigation. We and certain of our present and former officers and directors were named as defendants in four class action lawsuits filed in the United States District Court for the Northern District of California in 1998. The complaint in those suits alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, or the Exchange Act, and Securities and Exchange Commission Rule 10b-5 promulgated under the Exchange Act, in connection with public statements about our financial performance. Although this case was later dismissed, there can be no assurance that we will not be subject to similar litigation in the future. In addition, we recently settled a litigation that commenced in the last quarter of fiscal 2004 when we were sued by Systems America, Inc., a privately held company, in an action which alleged that, prior to our acquisition of Mokume Software, Inc. in November 2002, persons associated with Mokume Software misappropriated trade secrets and confidential information of Systems America, unfairly competed with Systems America with respect to its customer relationships, and infringed Systems America’s trademarks and trade names. Litigation can be expensive to defend, can consume
38
significant amounts of management time and could result in an adverse judgment or settlement that could have adverse effects on our results of operations and financial condition.
We will incur increased costs as a result of recently enacted laws and regulations relating to corporate governance matters and public disclosure. Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, rules adopted or proposed by the SEC and by the NASDAQ Stock Market and new accounting pronouncements, including new accounting rules regarding the expensing of stock options, will increase our costs to evaluate the implications of these laws, regulations and standards and comply with their requirements. To maintain high standards of corporate governance and public disclosure, we intend to invest resources to comply with evolving standards. We expect that this investment will result in increased general and administrative expenses in fiscal years 2006 and 2007 and a diversion of management time and attention from strategic revenues generation and cost management activities. In addition, these new laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as executive officers. We are taking steps to comply with applicable laws and regulations in accordance with the deadlines by which compliance is required, but we cannot predict or estimate the amount or timing of additional costs that we may incur to respond to their requirements and cannot be certain that we will be able to fully comply with the provisions of Section 404 of the Sarbanes-Oxley Act regarding compliance with certain assessments and auditor attestations regarding internal control structure reporting.
The requirement to account for stock options we grant as compensation expense will significantly reduce our net income and our earnings per share, and may result in or increase losses. Effective November 1, 2005, we adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”), using the modified-prospective transition method. SFAS 123(R) requires us to account for equity under our stock plans using a fair value-based model on the option grant date and record it as a stock-based compensation expense. Expenses we incur under SFAS 123(R) may significantly reduce our net income and our earnings per share, and may result in or increase our losses. As a result of adopting Statement 123(R), the Company’s net income before income taxes for the three and six months ended April 30, 2006 include stock-based compensation of $64,000 and $121,000, respectively. We now estimate the fair value of employee stock options and rights to purchase shares under its employee stock purchase plan or “ESPP” using a Black-Scholes-Merton Option-Pricing Model (see Note 2 to our Notes to Condensed Consolidated Financial Statements included in this report). A fair value-based model, such as the Black-Scholes-Merton option-pricing model, requires the input of highly subjective assumptions and does not necessarily provide a reliable single measure of the fair value of our stock options. Highly subjective assumptions used under the Black-Scholes-Merton option-pricing model include the expected stock price volatility and expected life and forfeiture rates of our options, which will require us to expense shares issued under employee stock purchase plans and stock options as a stock-based compensation expense using a fair value based model.
Adoption and application of accounting regulations and related interpretations and policies regarding revenue recognition could cause us to defer recognition of revenue or recognize lower revenues and profits. Although we use standardized license agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we must often negotiate and revise terms and conditions of these standardized agreements, particularly in multi-element or multi-year transactions. As our transactions increase in complexity with the sale of larger, multi-product, multi-year licenses, negotiation of mutually acceptable terms and conditions can extend the sales cycle and, in certain situations, may require us to defer recognition of revenue on such licenses. We believe that we are in compliance with Statement of Position 97-2, Software Revenue Recognition, as amended; however, these future, more complex, multi-element, multi-year license transactions, which may require additional accounting analysis to account for them accurately, could lead to unanticipated changes in our current revenue accounting practices and may contain terms affecting the timing of revenue recognition.
Charges to earnings resulting from the application of the purchase method of accounting for the merger with Poet and FastObjects may adversely affect the market value of Versant’s common stock. In accordance with the U.S. generally accepted accounting principles, Versant accounts for the merger with Poet and FastObjects, Inc. using the purchase method of accounting, which results in charges to earnings that could have a material adverse effect on the market value of Versant common stock. Under the purchase method of accounting, Versant has allocated the total estimated purchase price of Poet and FastObjects to net tangible assets and amortizable intangible assets based on their fair values as of the respective dates of the closing of these acquisitions, and recorded the excess of the purchase price over those fair values as goodwill. Versant will incur additional depreciation and amortization expense over the useful lives of certain intangible assets acquired in connection with these acquisitions, which will extend into future fiscal years. In addition, to the extent the value of goodwill or intangible assets are impaired, Versant may be
39
required to incur material charges relating to the impairment of those assets. Such amortization and potential impairment charges could have a material impact on Versant’s results of operations.
Risks Related to Our Industry
Our products face significant competition. For Versant Object Database and FastObjects products, we compete with other companies offering other database management systems. We face substantial competition from traditional relational database management companies including Oracle, Computer Associates, Sybase, IBM, and Microsoft. We also face competition from object database companies including Progress Software Corporation and Objectivity. Additionally, some prospective customers might attempt to build specialized data storage capability themselves using their own internal engineering resources, sometimes starting with low level operating system functionality, and other times utilizing lower level data storage routines that are commercially available, such as Berkeley DB, a simplified database without query processing capability.
Many of our competitors have longer operating histories, significantly greater financial, technical, marketing, service and other resources, better name recognition, broader suites of product offerings, stronger sales and distribution channels and a much larger installed base of customers than ours. In addition, many of our competitors have well-established relationships with our current and potential customers. Our competitors may be able to devote greater resources to the development, promotion, and sale of their products. They may further have more direct access to corporate decision-makers of key customers based on their previous relationships with customers. Our competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements and may be able to obtain sales of products competitive to ours through package sales of a suite of a variety of products that we do not offer. We may not be able to compete successfully against current or future competitors, and competitive pressures could have a material adverse effect on our business, operating results and financial condition.
We depend on successful technology development. We believe that significant research and development expenditures will continue to be necessary for us to remain competitive. While we believe our research and development expenditures will improve our product lines, because of the uncertainty of software development projects, these expenditures will not necessarily result in successful product introductions. Uncertainties affecting the success of software development project introductions include technical difficulties, delays in introductions of new products, market conditions, competitive products, and consumer acceptance of new products and operating systems. In addition, if we are required to adopt cost-conservation measures, we may be compelled to reduce the amounts of our investment in research and development activities, which could adversely affect our ability to maintain the competitiveness of our existing products, our ability to develop new products, and our future research and development capabilities. Recent reductions in our revenues and operating expenses could require us to limit our research and development expenditures, which in turn could adversely affect our ability to continue to timely develop technologies and products necessary for us to remain competitive.
We also face certain challenges in integrating third-party technology embedded in our products. These challenges include the technological challenges of integration, which may result in development delays, and uncertainty regarding the economic terms of our relationship with the third-party technology providers, which may result in delays of the commercial release of new products. We expect that evolving industry standards will affect our business. For example, the EJB 3.0 standard (JSR 220) for data storage in the Java 2 Enterprise Edition will offer risks and opportunities for Versant. The principal risk is that this technology may stimulate the creation of a broader range of competitors, and some of them could potentially be able to offer applications bundled with application servers. The opportunity is that we expect a very large number of applications to be built with programming interfaces that can readily use Versant products to gain performance and other advantages.
We depend on our personnel, for whom competition is intense. Our future performance depends in significant part upon the continued service of our key technical, sales and senior management personnel. The loss of the services of one or more of our key employees could have a material adverse effect on our business. Our future success also depends on our continuing ability to attract, train and motivate highly qualified technical, sales and managerial personnel. Our current financial position and expense reductions may make it more difficult for us to attract and retain highly talented individuals due to constraints on our ability to offer compensation at levels that may be offered by larger competitors.
We must protect our intellectual property. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products, obtain or use information that we regard as proprietary or use or make copies of our products in violation of license agreements. Policing unauthorized use of our products is difficult and potentially expensive. In addition, the laws of many jurisdictions do not protect our proprietary rights to as great an extent as do the laws of the United States. Shrink-wrap licenses may be wholly or partially unenforceable under the laws of certain jurisdictions, and copyright and trade secret
40
protection for software may be unavailable in certain foreign countries. Our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop similar technology.
We may be subject to claims of intellectual property infringement. We expect that developers of object-oriented technology will increasingly be subject to infringement claims as the number of products, competitors and patents in our industry sector grows. For example, in 2004 we were served with a complaint filed by Systems America, Inc. alleging that we received misappropriated intellectual property from Mokume Software, Inc. when we acquired Mokume in November 2002 and that Mokume had interfered with certain business relationships of Systems America. While this action has since been settled, any claim of this type, whether meritorious or not, could be time-consuming, could result in costly litigation, could cause product shipment delays and require us to enter into royalty or licensing agreements or pay amounts in settlement of the claims or pursuant to judgments. If any of our products or technologies were found to infringe third-party rights, royalty or licensing agreements to use such third-party rights might not be available on terms acceptable to us, or at all, and we might be enjoined from marketing an infringing product or technology, each of which circumstances could have a material adverse effect on our business, operating results and financial condition.
Risks Related to our Stock
Our common stock is listed on the NASDAQ Capital Market. We do not currently meet the listing requirements necessary for our common stock to be listed on the NASDAQ National Market System (“NMS”). Effective October 1, 2002, we transferred the listing of our common stock from the NMS to the NASDAQ Capital Market. The listing of our common stock on The NASDAQ Capital Market may be perceived as a negative by investors and may adversely affect the liquidity and trading price of our common stock. We may be unable to re-list our common stock on the NMS.
In order for our common stock to continue to be listed on the NASDAQ Capital Market, we must satisfy the NASDAQ Capital listing requirements, and there can be no assurance that we will continue to be able to do so. Although the continued listing requirements of the NASDAQ Capital Market are not as demanding as those of the NMS, they do, among other things, require that our stock have a minimum bid price of $1.00 per share, which we sometimes refer to below as the “$1.00 minimum price requirement”, and that either (i) we have shareholders’ equity of $2.5 million, or (ii) we have $500,000 in net income or (iii) the market value of our publicly held shares be $35.0 million or more. As reported in our September 17, 2004 report on Form 8-K, on September 15, 2004, we received notification from the NASDAQ Stock Market that, because our common stock had then traded at a price below $1.00 per share for thirty consecutive trading days, we were required to regain compliance with the $1.00 minimum price requirement to avoid delisting of our common stock from the NASDAQ Capital Market. As a result of our adoption of a 1-for-10 reverse stock split that was approved by our shareholders on August 22, 2005, as of September 12, 2005 the closing bid price of our common stock exceeded $1.00 per share for more than ten consecutive trading days and on September 8, 2005 we received written notification from the NASDAQ Stock Market that we had regained compliance with this minimum bid price requirement. Our stockholders’ equity as of April 30, 2006 was $11.2 million, and thus is still substantially above the NASDAQ Capital Market continued listing requirement that our shareholders’ equity be $2,500,000 or greater. However, there can be no assurance that we might not experience non-compliance with these listing requirements at some time in the future. If our common stock were to be delisted from trading on the NASDAQ Capital Market, then the trading market for our common stock and the ability of our shareholders to trade our shares and obtain liquidity and fair market prices for their Versant shares are likely to be significantly impaired and, as a result, the market price of Versant’s common stock could be expected to decline significantly.
We may engage in future acquisitions that dilute our shareholders and cause us to incur debt or assume contingent liabilities. As part of our strategy, we may review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer us growth opportunities. In the event of any future acquisitions, any or all of the following could potentially occur:
· pay amounts of cash to acquire assets or businesses;
· issue stock that would dilute current shareholders’ percentage ownership;
· incur debt; or
· assume liabilities.
Such acquisitions also involve numerous risks, including the following:
· problems combining the acquired operations, technologies or products or integration of new personnel;
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· the incurrence of unanticipated costs in completing such acquisitions or in inheriting unforeseen liabilities and expenses of acquired businesses;
· diversion of management’s attention from our core business;
· adverse effects on existing business relationships with suppliers and customers;
· risks associated with entering markets in which we have no or limited prior experience; and
· potential loss of key employees of purchased organizations.
There can be no assurance that we will be able to successfully integrate any acquired businesses, products or technologies that we might purchase in the future.
Our stock price is volatile. Our revenues, operating results and stock price have been and may continue to be subject to significant volatility, particularly on a quarterly basis. We have previously experienced revenues and earnings results that were significantly below levels expected by security analysts and investors, which have had an immediate and significant adverse effect on the trading price of our common stock. This may occur again in the future. Additionally, as a significant portion of our revenues often occurs late in the quarter, we may not note of any revenues shortfall until late in the quarter, which, when announced, could result in an even more immediate and adverse effect on the trading price of our common stock. The recent 1-for-10 reverse split of our common stock that was implemented in August 2005 may also have the effect of increasing the volatility of our stock’s price.
We may desire or need to raise additional funds through debt or equity financings, which would dilute the ownership of our existing shareholders and possible subordinate certain of their rights to rights of new investors. We may choose to raise additional funds in debt or equity financings if they are available to us on terms we believe reasonable to increase our working capital, strengthen our financial position or to make acquisitions. Any sales of additional equity or convertible debt securities would result in dilution of the equity interests of our existing shareholders, which could be substantial. Additionally, if we issue shares of preferred stock or convertible debt to raise funds, the holders of those securities might be entitled to various preferential rights over the holders of our common stock, including repayment of their investment, and possibly additional amounts, before any payments could be made to holders of our common stock in connection with an acquisition of the company. Such preferred shares, if authorized, might be granted rights and preferences that would be senior to, or otherwise adversely affect, the rights and the value of Versant’s common stock. Also, new investors may require that we enter into voting arrangements that give them additional voting control or representation on our board of directors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign currency hedging instruments. We transact business in various foreign currencies and, accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. To date, the effect of changes in foreign currency exchange rates on revenue and operating expenses has not been material. Operating expenses incurred by our foreign subsidiaries are denominated primarily in local currencies. We currently do not use financial instruments to hedge these operating expenses. We intend to assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis during the remainder of fiscal 2006.
Our exposure to foreign exchange risk is related to the magnitude of foreign net profits and losses denominated in euros and Pound Sterling, as well as our net position of monetary assets and monetary liabilities in those foreign currencies. These exposures have the potential to produce either gains or losses within our consolidated results. Our European operations, however, in some instances act as a natural hedge since both operating expenses as well as revenues are denominated in local currencies. In these instances, although an unfavorable change in the exchange rate of euros or Pound Sterling against the U.S. dollar will result in lower revenues when translated into U.S. dollars, the operating expenditures will be lower as well. Additionally, since most of our cash resides outside the United States, we have maintained approximately 32% of our cash balance in Europe in the form of U.S. dollars to neutralize the impact of any foreign currency fluctuations.
We do not use derivative financial instruments for speculative trading purposes.
Interest rate risk. Our cash equivalents primarily consist of money market accounts; therefore, we do not believe that our interest rate risk is significant at this time.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Securities and Exchange Commission, or SEC, rules define the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in its reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure
Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our chief executive officer and chief financial officer, as of the end of the period covered by this report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
(b) Changes in Internal Control over Financial Reporting.
There was no change in our internal control over financial reporting during the three months ended April 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
SEC rules define the term “internal control over financial reporting” as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2006 Annual Meeting of Shareholders on April 24, 2006. Set forth below are descriptions of the matters voted on at the meeting and the results of the votes taken at the meeting.
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1. Election of Directors:
Name of Director |
| Votes For |
| Votes Withheld |
|
|
|
|
|
|
|
Jochen Witte |
| 2,330,638 |
| 10,058 |
|
|
|
|
|
|
|
Uday Bellary |
| 2,337,685 |
| 3,011 |
|
|
|
|
|
|
|
Wiliam Henry Delevati |
| 2,337,635 |
| 3,061 |
|
|
|
|
|
|
|
Herbert May |
| 2,337,730 |
| 2,966 |
|
|
|
|
|
|
|
Bernhard Woebker |
| 2,330,838 |
| 9,858 |
|
2. Ratification of the appointment of Grant Thornton LLP as our independent registered public accounting firm for fiscal year 2006:
Votes For |
| Votes Against |
| Vote Abstained |
| Broker Non-Votes |
|
|
|
|
|
|
|
2,338,660 |
| 936 |
| 1,100 |
| — |
(a) Exhibits
The following exhibits are filed herewith:
31.01 | Rule 13a-14(a) Certification of Principal Executive Officer and Principal Financial Officer |
|
|
32.01 | Section 1350 Certification of Principal Executive Officer and Principal Financial Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VERSANT CORPORATION | |
|
|
Dated: |
|
June 14, 2006 | /s/ Jochen Witte |
| Jochen Witte |
| President and Chief Executive Officer and |
| Chief Financial Officer, |
| (Duly Authorized Officer and Principal |
| Financial Officer and Chief Accounting Officer) |
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