Versant 10-K 2005
Documents found in this filing:
Washington, D.C. 20549
Commission file number: 0-28540
(Exact name of registrant as specified in its charter)
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 preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or an amendment to Form 10-K. o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No ý
The aggregate market value of the outstanding common stock held by non-affiliates of the Registrant as of April 30, 2004, the last business day of the registrants most recently completed second fiscal quarter, based on the closing price of $2.08 per share on the Nasdaq Smallcap Market on April 30, 2004, was approximately $62,138,003.20. This amount excludes 631,764 shares of common stock held by directors, officers and certain shareholders of the Registrant as of April 30, 2004. Exclusion of shares held by any person should not be construed to indicate that that person possesses power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or is under common control with the Registrant.
As of February 11, 2005, there were outstanding 34,823,361 shares of the Registrants common stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement relating to its 2005 Annual Meeting of Shareholders are incorporated by reference in Part III of this Annual Report on Form 10-K where indicated. Alternatively, the Registrant may file an amendment to this Form 10-K to provide such information within 120 days following the end of Registrants fiscal year ended October 31, 2004.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended October 31, 2004
TABLE OF CONTENTS
VDS, Versantâ enJinâ, Versant JDO, Versant Open Access and VRTF are trademarks of Versant in the United States and/or other countries. All other corporate or trade names or service marks referred to in this report are the names or marks of their respective owners in the United States and/or other countries.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K 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. These forward-looking statements are based on our current expectations about our business and industry and reflect our beliefs and assumptions based upon information that is reasonably available to us at the date of this report. In many cases you may identify these forward-looking statements by words such as will, should, may, might, believes, anticipates, expects, intends, estimates and similar expressions. These forward-looking statements may include, among other things, projections of our future financial performance and trends anticipated for our business.
We caution investors that forward-looking statements are only predictions, forecasts or estimates based upon our current expectations about future events. The forward-looking statements are not guarantees of our future performance and are subject to significant risks and uncertainties that are difficult to predict. Our actual results and performance may differ materially from the results and performance anticipated by any forward-looking statements due to these risks and uncertainties. Some of the important risks and factors that could cause our results and performance to differ from results or performance anticipated by this report are discussed in Item 7 of this report, Managements Discussion and Analysis of Financial Condition and Results of Operation - Risk Factors, which you should read carefully. We undertake no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise or occur after the date of this report or for any other reason. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.
Item 1. Business.
We are a leading provider of object-oriented data management and data integration software that forms a critical component of the infrastructure of enterprise computing. Companies use our solutions to solve complex data management and data integration problems. To address these problems, we design, develop, market and support database management systems, data access and data integration products. We also provide related product support, training and consulting services to assist users in developing and deploying software applications based on our products. We operate our business within a single operating segment that we refer to as Data Management. We were incorporated in California in August 1988 under the name Object Sciences Corporation and completed the initial public offering of our common stock in July 1996. In March 2004, through a merger, we acquired Poet Holdings, Inc., or Poet, a European-based provider of object-oriented data management software whose stock was publicly traded prior to the merger. Our principal executive offices are located at 6539 Dumbarton Circle, Fremont, California 94555 and our telephone number is (510) 789-1500. Our website can be found at www.versant.com.
Overview of our Products and Services
We provide sophisticated data management, data access and data integration software solutions designed to address the complex data management needs of enterprises and providers of products requiring data management functions. Our products are typically deployed to manage data for business systems to enable these systems to access and integrate data necessary for their data management applications. Our Versant Developer Suite, or VDS and Versant Open Access product offerings are used primarily by larger enterprises, such as technology providers, telecommunications carriers, government defense agencies and defense contractors, healthcare companies and companies in the financial services and transportation industries, each of which have significant large-scale data management requirements. With the incorporation of Poets FastObjects solution into our product line following our March 2004 merger with Poet, we have expanded the scope of our solutions to also address data management needs of smaller business systems. Our customers data management needs can involve many business functions, ranging from management of the use and sharing of a companys internal enterprise data to the processing of externally originated information such as customer enrollment, billing and payment transaction data. Our solutions have also been used to solve complex data management issues such as fraud detection risk analysis and yield management. Our data access products deliver enterprise class data access to a variety of data management systems, including our own.
In addition to our product offerings, to assist users in developing and deploying applications based on VDS, FastObjects, and Versant Open Access, we offer a variety of services, including consulting, training and technical support services. We also offer a dedicated consulting practice for IBM WebSphere customers. Under an agreement signed in late 2000 and renewed most recently in August 2004, we allocate certain of our consultants to IBM and both IBM and Versant sales representatives sell these consultants services.
Benefits of our Solutions
Our VDS, FastObjects and Versant Open Access products provide customers the following benefits for specialized data management:
High Performance. Our object-based architecture provides direct access or navigation to stored objects. The balanced client-server architecture of our products enhances performance by efficiently distributing processing burdens between clients and servers to leverage the processing power of networked computers.
Highly Scalable Support for Distributed Computing. Through object-level operations, compatibility with Web browsers and other design features, our products can be scaled to work in various environments ranging from small workgroup operations to operations involving thousands of users over wide area networks or the Internet.
Reliability, Availability and Serviceability. Our VDS product offers a number of features designed to permit continuous operation, including features providing online backup and recovery and online modification of the database system, as well as system utilities that can operate while the system is running. These features, together with replication and disk mirroring provided by our Fault Tolerant Server, support operations 24 hours per day, 365 days per year.
Language-Independent Support for Object-Oriented Programming. Our products provide native support for the leading object-oriented software development languages - C++ and Java. This quality of our products facilitates rapid and flexible application development by our customers and the maintenance and evolution of complex, dynamic applications that closely model real-world systems and processes.
Support for Component Architectures. Versant Open Access integrates with leading J2EE application servers, including the IBM WebSphere and BEA Weblogic application servers. These application servers enable users to build and deploy J2EE-based applications that will work compatibly and directly with Versant Open Access in order to gain the inherent productivity and performance advantages of the underlying object or relational databases.
Integration with Users Existing Information Systems. Versant products operate on a wide range of server platforms including: UNIX platforms from Sun Microsystems, Hewlett-Packard, IBM, Compaq and Silicon Graphics; Linux platforms from Red Hat; and Microsoft Windows and NT platforms. In addition, our customers applications, which are based on our product, can interoperate with information stored in relational database management systems, enabling these applications to complement the structured applications strengths of relational database management systems.
Fiscal 2004 Overview, Developments and Strategy
In fiscal 2004 we sought to expand our product line, working capital and global reach by acquiring Poet Holdings, Inc., or Poet, through a merger we consummated in March of 2004. Poet was the developer of our FastObjects product and was a publicly held company prior to the merger. Based in Germany, Poet was acquired in part to expand our European sales and operations. Later in the year we also acquired FastObjects, Inc., the exclusive North American distributor of Poets FastObjects product and purchased certain technology from JDO Genie (PTY) LTD. that now forms the core of our Versant Open Access product. During fiscal 2004, we focused our sales and marketing efforts on seeking revenue from our data management products, VDS and FastObjects, our data access product, Versant Open Access, and from our consulting services. VDS and, to a lesser extent FastObjects, were the major drivers of our license revenues in fiscal 2004 and a key focus of our marketing efforts.
We derived approximately 58% of our revenue from our services programs in fiscal 2004. Our services programs include paid maintenance and paid support of our data management and data access products, and our WebSphere Professional
Services practice, which is intended to produce incremental revenue, as well as to serve as an additional channel for generating new product license and maintenance revenue.
In fiscal 2004, the technology industry sector was the largest source of our revenue. The incorporation of Versant products into the offerings of independent software vendors (ISVs) such as PeopleSoft and Borland and increasing sales of the ISVs products have increased license revenue in this sector. Examples of these technology applications are demand consensus forecasts, collaborative planning, and requirements management. In addition, the growth of the Versant WebSphere Professional Services practice since its inception in year 2000 has increased the amount of our business in the technology sector because of increasing adoption of WebSphere by technology companies.
In fiscal 2004, the telecommunications industry also continued to be a very significant vertical market sector for us. Customers in the telecommunications industry have used our products in such strategic distributed applications as network modeling and management, fault diagnosis, fraud prevention, service activation and assurance, and customer billing. We have also attained customer acceptance in other vertical markets, including defense, financial services, transportation, and health care.
Products and Services
Versant Developer Suite (VDS)
VDS, a sixth generation object database management system, is designed to support multi-user, commercial applications in distributed environments. VDS enables uses to store, manage and distribute information that we believe often cannot be administered effectively by traditional database technologies, including information of the following types:
real-time data, such as graphics, images, video, audio and unstructured text;
dynamic, graph-oriented data, such as network management data and advanced financial instruments; and
meta-data, data aiding integration of diverse systems, and workflow information, which taken together enable the construction of systems that integrate diverse systems and add new functionality, often making this functionality available over the Internet.
The object-oriented, balanced client-server architecture of VDS provides the basis for high-performance, scalable distributed applications. We believe that VDS offers performance superior to that of relational database management systems, particularly for complex data applications, for which VDS has the capability of processing a wide variety of abstract data types in a highly concurrent, high performance manner.
VDS is designed to integrate up to 65,000 databases connected over a like number of locations on a variety of hardware and software platforms. Each database has a theoretical storage capacity of 4.6 million terabytes, an amount far beyond the actual capacity of most existing operating systems. VDS implements a variety of database features, including a two-phase commitment for distributed transaction integrity and database triggers to monitor changing events and data and to notify users and applications when specified events occur. In addition, on-line management utilities enable routine maintenance to be performed while the database is running. These include utilities to perform backup operations, manage log files, dynamically evolve database schema, add, delete and compress volumes on disk storage and related functions. These utilities provide multiple levels of administrative access and application security. We also believe that use of VDS allows our customers to reduce the time needed to develop applications for their data management systems and improve system performance.
With version 6.0 of VDS, we bundle several components, including the core object database management system, C++ and Java language interfaces, XML for import and export of data into the database and asynchronous replication services to provide updates among distributed Versant databases. We believe that by bundling these components with VDS we enhance our solution and make it easier for our customers to deploy these components.
As part of the VDS family we also offer Fault Tolerant Server and High Availability Backup Solution, options that are used in situations that require advanced capabilities.
Versant Fault Tolerant Server provides for highly reliable operations in mission-critical environments. This product provides transparent failure recovery by connecting database clients to synchronized copies of the database stored on physically separate computers. If one of the databases fails due to operating system failure, hardware breakdown or other interruption, the other database continues operation without application interruption. When the failed database is restored, the two databases automatically resynchronize and resume operations without application interruption.
Our High Availability Backup Solution enables VDS to use the mirroring and backup features of other enterprise storage systems to take an online backup of very large data volumes within seconds, without impacting transaction response times.
Versant enJin has been replaced by VDS using VDSs Java Data Objects (JDO) language interface. enJin provided the benefits of an object-oriented database expressed in a Java standard interface, but used a proprietary Versant interface internally. JDO is a Java standard, and with VDS, provides the functionality of enJin but eliminates the need for a proprietary interface.
FastObjects is an object database management system designed to provide zero-administration and work natively with the customers product. The primary target for FastObjects product line is for use as an embedded data management system to be integrated in a customers products. FastObjects is used in a vast range of applications, including medical devices, vending machines, telecom equipment and defense systems.
Versant Open Access
Versant Open Access is a software product family that provides business application developers with a powerful object storage tool. Versant Open Access reduces the cost of object storage, makes it available to the entire development team and simplifies the development process. In addition, Versant Open Access provides high-productivity visual development tools so the learning curve is quick and easy, and the product is productive for programmers with a wide range of skill levels. Versant Open Access is designed to provide high-performance, a challenge for many other competitive products in this space. This was recently validated by Versant Open Access earning top honors in the TORPEDO benchmark by The Middleware Company. Versant Open Access is offered in versions for applications written in Java and Microsoft .NET environments. Versant JDO, a product we announced last year, and technology we acquired from JDO Genie (PTY) LTD. in June 2004, have both been absorbed into the Versant Open Access family.
As previously disclosed in a Form 8-K filed on August 25, 2004, we recorded a non-cash charge in our statement of operations for the three months ended July 31, 2004 which represented the net book value of all assets associated with our Versant Real Time Framework product (VRTF). VRTF was launched in fiscal 2003 and was based on technology we acquired through our November 2002 acquisition of Mokume Software, Inc. While Versant believes that the need still exists in the marketplace for a product such as VRTF, our primary operational focus since merging with Poet in March 2004 has been on integrating the two companies and leveraging their respective object database and data access product suites, with the goal of increasing Versants accessible market. We have determined that this objective requires priority and a greater dedication of resources within our organization such that we cannot distract or dilute our efforts in this regard by continuing with the more early stage real time initiative addressed by VRTF.
Licensing and Pricing of Products
We categorize our customers into two broad groups, End Users and Value Added Resellers (VARs). Our End User customers are companies who use our products internally and do not redistribute our product outside of their corporate organizations. Our VAR customers include traditional Value Added Resellers, Systems Integrators, OEMs and other vendors who redistribute our products to external third party customers, either individually or as part of an integrated product. We license our data management products through two types of perpetual licensesdevelopment licenses and deployment licenses. Development licenses are typically sold on a per seat basis and authorize a customer to develop an application program that uses our software product.
Before an End User customer may 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 VDS and FastObjects varies according to several factors, including the number of computer servers on which the application will run and the number of users that will be able to access the server at any one time. Customers may elect to simultaneously purchase development and deployment licenses for an entire project.
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 resellers 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 application software distributed or computed as a percentage of the selling price charged by the VAR to its end-user customers and these royalties may be prepaid in full or paid upon deployment. Provided that all other conditions for revenue recognition have been met, revenue is recognized as follows: (i) as to prepaid license arrangements, revenue is recognized when the prepaid licenses are sold to the VAR, and (ii) as to other license arrangements, revenue is recognized at the time the VAR provides a royalty report to us for sales made during a given period.
Revenue from our resale of third-party products is recorded at total contract value with the corresponding cost included in cost of sales when we act as a principal in these transactions and we assume 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, revenue from our resale of third-party products or services is recorded at contract value net of the cost of sales.
In addition to our product offerings, we offer customers training, consulting and maintenance and technical support services. We provide a variety of training and consulting services to assist customers in the design, development, education and management of applications they build on the base of our core products as well as IBMs WebSphere application server. Training services are offered for a variety of Versant-specific and object-related technologies and range from beginning to advanced levels. Consulting services are available for analysis and design assistance, mentoring and technical transfer, application coding, design reviews and performance analysis. In addition, we provide custom development services to customers that request unique or proprietary product extensions. Depending on the nature and complexity of the custom development services requested, these services may be performed by our consulting employees or by third-party integrators that have joined our IGNITE! Partner Program and have received training from us. Our IBM WebSphere consulting services are provided under an agreement signed in late 2000 and renewed in August 2004, pursuant to which we allocate certain of our consultants to IBM for WebSphere consulting and both IBM and Versant sales representatives sell these consultants services.
Our maintenance and technical support services are generally available at an annual fee that varies depending on the type of support the customer requires. Maintenance and support contracts, which typically have twelve-month terms, are offered concurrently with the initial license of our product and entitle the customer to telephone support and to product and documentation updates. For additional fees, customers may purchase a special support package that provides a designated support engineer, and may obtain telephone support available 24 hours per day. Maintenance contracts are typically renewable annually and typically paid for in advance for all products except deployments of FastObjects, which are typically paid in arrears.
Customers and Applications
VDS, FastObjects and Versant Open Access are licensed for development and/or deployment in a wide range of applications. A substantial amount of our sales are for applications in the technology, telecommunications, defense, healthcare and financial services sectors. Many of our customers have licensed multiple copies for use in different applications.
In our fiscal years ended October 31, 2004, 2003 and 2002, IBM represented 17%, 19%, and 14% of our total revenues, respectively. Versants agreement with IBM is comprised of a Customer Solutions Agreement dated as of June 16, 2000 as supplemented by a Statement of Work that was issued under that agreement in October 2000, and amendments thereto, pursuant to which Versant performs certain consulting services for IBM customers as described below. However, nothing in our agreement with IBM commits IBM to use Versants services at any particular level, or to use Versants services at all. Therefore we have no assurances that it will receive revenue from our relationship with IBM. We are however required to maintain a certain number of consulting personnel with certain skill levels to service this business. Consequently, we believe that the quality and pricing of our services to IBM (rather than the terms of our agreement with IBM) are the primary factors in determining the ongoing viability and duration of our relationship with IBM.
Our future performance will depend in significant part on the growth of the use of VDS, FastObjects and Versant Open Access in technology, telecommunications, defense, healthcare and financial market applications and the continued acceptance of our products within these industries. Consequently, the failure of our products to perform favorably in and
become an accepted component of applications for these industries, or a slower than expected increase or a decrease in the volume of sales of our products and services to technology-based, telecommunications, defense, healthcare or financial services companies, could have a material adverse effect on our business.
Sales and Marketing
We market and sell our products principally through our direct sales force and through value-added resellers, systems integrators and distributors.
Direct Sales. Our direct sales organization is based at our corporate headquarters in Fremont, California and at our other regional offices around the world. The direct sales organization includes our field sales personnel, who are responsible for account management, and systems engineers, who answer technical questions and assist customers in running benchmarks against competitive products and developing prototype applications.
Indirect Sales. An important part of our future sales strategy will be the development of indirect distribution channels, such as value-added resellers, systems integrators and foreign distributors. We expect to continue our focus on indirect sales channels in fiscal 2005. Systems integrators may include our products with those of other vendors, to provide a complete solution to their customers. Value-added resellers and systems integrators are typically not subject to any minimum purchase or resale requirements and can cease marketing our products at any time. Certain value-added resellers, distributors and systems integrators offer products they produce or that are produced by third parties that compete with our products.
Marketing. Our marketing programs are aimed at audiences with the goal of building visibility and generating leads for our business. Our marketing programs include our efforts at cultivating media and analyst relations, fostering valuable investor communications, speakers programs, online marketing, partner marketing programs and participation in conferences and tradeshows.
Sales Process. The cycle for complete a sale of our products to new, large enterprise customers can exceed six months and may extend to a year or more. For existing customers with successfully deployed applications, sales cycles for new applications of our core products are generally much shorter. During the sales cycle, meetings involving both technical and management staff are conducted frequently at the prospective customers site and at our headquarters. As part of their product selection process, our prospective customers typically perform a detailed technical evaluation or benchmark of our object-based technologies, often directly comparing them to competitive products. Upon completion of the evaluation, a customer who chooses our solution may purchase one or more development licenses depending upon the number of programmers that will develop and build the customers application. Additionally, a customer may purchase technical support, training courses and consulting services. Our customers may purchase deployment licenses at the same time as they purchase development licenses, or may defer their purchase of deployment licenses and related maintenance until they complete the application development (a process that typically takes at least six months and can exceed one year). Once an application is ready for deployment, a customer may purchase deployment licenses from us.
Shipping and Backlog. All our software is shipped from our Fremont facility and is delivered to the customer upon receipt of an approved order and a signed license agreement. We typically do not have a material backlog of unfilled license orders at any given time, and we do not consider backlog to be a meaningful indicator of our future performance.
International Sales and Marketing. Our foreign sales are recorded by subsidiaries located in Germany and the United Kingdom who also sell our products through distributors and value added resellers, as well as directly to end-users. Our revenues from international sales were $8.4 million in the year ended October 31, 2004, $5.4 million in the year ended October 31, 2003 and $6.4 million in the year ended October 31, 2002. Our international revenues increased in fiscal 2004, in part as a result of our acquisition of Poet, whose revenues are largely from European customers. For information regarding the risks attendant to our foreign operations, please see Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk FactorsRisks Related to Our BusinessWe increasingly depend on our international operations.
The table below presents the Companys revenue by region (in thousands):
Research and Development
We have committed, and expect to continue to commit, substantial resources to our research and development efforts. Our current development efforts are focused on:
ongoing efforts to improve the performance and scalability of our core products;
supporting new industry standards for our Versant Open Access product;
improving the integration of our products with leading third party technology providers; and
providing support and/or integration with existing and emerging computing standards.
Our research and development expenses were approximately $5.1 million in the year ended October 31, 2004, $4.3 million in the year ended October 31, 2003 and $5.8 million in the year ended October 31, 2002. To date, all research and development expenditures have been expensed as incurred.
To date, our products have been developed almost entirely internally by our own research and development personnel, with the principal exceptions of FastObjects, which we acquired in connection with our acquisition of Poet and Versant Open Access, which is based on the core technology we purchased form JDO Genie (PTY) LTD. We selectively supplement our internal staff with outside consultants having expertise in specific areas. Our research and development team consists mainly of software engineers with significant experience and expertise in technologies such as:
object-oriented software development, including Java;
relational database technology;
design and integration;
large-scale run-time environments; and
We perform some of our porting and enhancement engineering work in our development office in India. Versant India, our wholly owned subsidiary, had 26 employees as of October 31, 2004 and occupies an approximately 6,500 square foot facility leased in Pune, India.
Pursuant to a consulting agreement, we have contracted to have some research and development work for our Versant Open Access product performed for certain periods by JDO Genie (PTY) LTD, a South African company from which we acquired core technology used in Versant Open Access
We believe that our future results will depend on our ability to improve our current technologies and to develop new products and product enhancements on a timely basis. The market for our products and services is characterized by changing customer demands, rapid technological change and frequent introductions of new products and product enhancements. Customer requirements for products can change rapidly as a result of innovations or changes within the computer hardware and software industries, the introduction of new products and technologies (including new hardware platforms and programming languages) and the emergence, evolution or widespread adoption of industry standards. The actual or anticipated introduction of new products, technologies and industry standards can render existing products obsolete or unmarketable or result in delays in the purchase of these products. As a result, the life cycles of our products are difficult to estimate. We have in the past experienced delays in the introduction of new products and features, and may experience similar delays in the future. If we are unable, for technological or other reasons, to develop new products or enhancements of existing products in a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition will be materially adversely affected.
Intellectual Property and Other Proprietary Rights
We rely primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. For example, we license our software pursuant to signed license agreements and, to a lesser extent, shrink-wrap licenses displayed in evaluation downloads and in software installation screens, which impose certain restrictions on the licensees ability to utilize our software. In addition, we take steps to avoid disclosure of our trade secrets, such as requiring persons with access to our proprietary information to execute non-disclosure agreements with us, and we restrict access to our software source code. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. We were also awarded a United States patent (No. 5,822,759) for our proprietary cache system used within our product suites, which expires in 2015.
For our VDS and FastObjects products, we compete with companies offering object and relational database management systems, many of which are large and very well established corporations with broader product lines and stronger sales and distribution channels. For our Versant Open Access product, our competitors consist of both relational database management companies, many of whom have incorporated, or are expected to incorporate in their systems object-oriented interfaces and other functionality more directly competitive with our technologies, as well as companies who already have substantial experience in object-oriented software development and provide components similar to those included in Versant Open Access.
Many of our competitors, especially Oracle and Computer Associates, have longer operating histories, significantly greater financial, technical, marketing, service and other resources, significantly greater name recognition, broader product offerings and a larger installed base of customers. In addition, many of our competitors have well-established relationships with our current and potential customers. 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, pricing, operating results and financial condition.
For a more detailed discussion of the competition we face in our business, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk FactorsRisks Related to Our IndustryOur products face significant competition.
As of October 31, 2004, we and our subsidiaries had a total of 126 employees, of whom 50 were based in the United States, 50 in Europe, and 26 in India. Of the total, 47 employees were engaged in engineering and technical services, 27 were engaged in sales and marketing, 27 were engaged in the services organization and 25 were engaged in general administration and finance. To our knowledge, none of our employees is represented by a labor union with respect to employment with Versant. We have experienced no organized work stoppage to date and believe that our relationship with our employees is good.
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, operating results and financial condition.
Our principal administrative, sales, marketing and research and development operations are located in Fremont, California. Our current lease, which expires in June 2007, is for a building of approximately 54,000 square feet. However, we only occupy approximately 21,000 square feet of this space, and in the fourth quarter of fiscal year 2004 we recorded a restructuring charge to reflect this reduced space usage in future periods.
Additionally, we lease a sales office in Plano, Texas and our international subsidiaries lease space, generally under multi-year operating lease agreements, in Pune, India, and in both Munich and Hamburg, Germany. In connection with the restructuring event previously mentioned, we closed the sales office that we formerly leased in Basingstoke, England. We believe that our current facilities will be adequate for our requirements for the next several years.
We may from time to time be subject to various legal proceedings in the ordinary course of business. Currently we are not subject to any material legal proceedings required to be disclosed under this Item 3.
We held our 2004 Annual Meeting of Shareholders on August 17, 2004. Set forth below are descriptions of the matters voted on at the meeting and the results of the votes taken at the meeting:
Set forth below is information regarding our executive officers as of February 14, 2005:
Nick Ordon has served as President, Chief Executive Officer and a director of the Company since he joined Versant in January 1998. From July 1996 to December 1997, Mr. Ordon was Vice President and General Manager of Messaging at Lotus Development Corporation, a software development company and wholly-owned subsidiary of International Business Machines Corporation. From August 1994 to July 1996, he was Vice President and General Manager of the Commercial Business Unit of Lockheed Martin Corporation, an aerospace products company. From January 1993 to August 1994, Mr. Ordon served as General Manager, NetWare Operations with Hewlett-Packard Company. Prior to entering industry, Mr. Ordon was a pilot in the United States Air Force. Mr. Ordon received both a Bachelor and Masters of Science degree in Aerospace Engineering from the University of Colorado and a Masters of Business Administration degree in Finance and Operations from Syracuse University.
Lee McGrath has served as Versants Vice President, Finance and Administration, Chief Financial Officer and Secretary since joining Versant in July 2000. From June 1999 to July 2000, he served as Director of Financial Planning and Analysis, Flat Panel Systems, for Philips Components, a division of Philips Electronics. From June 1997 to May 1999, Mr. McGrath served as Controller for Digital Link Corporation, a networking equipment company. From December 1982 to June 1997, he was with Measurex, a manufacturer of electronic control systems, where he served in a variety of financial management and controller positions, in both the companys U.S. and overseas offices. Mr. McGrath is a Chartered Certified Accountant and received a Masters of Business Administration degree from Pepperdine University.
Jochen Witte has served as President, European Operations since joining Versant in March 2004 following Versants merger with Poet Holdings, Inc. Mr. Witte is a member of Versants Board of Directors as well as being responsible for Versants European operations. Most recently, Mr. Witte was the CEO of Poet Holdings Inc., which he co-founded in 1993. He initially worked as the Managing Director of Germany and became Poets Chief Financial Officer in 1999 when Poet went public. Prior to working with Poet, Mr. Witte was with BKS Software, where he rose to Managing Director after beginning with responsibility for sales and training. Mr. Witte received a degree in Business Administration from the Berlin Technical University and also attended the University of Wales as an exchange student.
There is no arrangement or understanding between any of our executive officers and any other person pursuant to which any executive officer was or is to be selected as an officer, except that Mr. Witte was appointed to his current office in connection with our merger with Poet. There is no family relationship between any of the foregoing executive officers or between any of such executive officers and any of the members of our Board of Directors. Our executive officers serve at the discretion of the Board.
Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
Price Range of Common Stock
Our common stock is quoted on the Nasdaq SmallCap Market under the symbol VSNT. Our common stock commenced trading on the Nasdaq National Market on July 18, 1996. From July 19, 1999 until March 7, 2000 our common stock was traded on the Nasdaq SmallCap Market. From March 8, 2000 to September 30, 2002, our common stock was traded on the Nasdaq National Market. Since October 1, 2002 our common stock has been quoted on the Nasdaq SmallCap Market. We requested that listing of our common stock be transferred to the Nasdaq Smallcap Market as of October 1, 2002 due to the fact that it then seemed unlikely that, in the near term, we would continue to be able to satisfy the listing criteria of the Nasdaq National Market System. The following table lists the high and low intra-day prices of our common stock reported on the Nasdaq Stock Market for the periods indicated during the last two fiscal years
On January 24, 2005 the closing price of our common stock was $0.77 on the Nasdaq Stock Market. We do not currently meet the listing requirements necessary for our common stock to be listed on the Nasdaq Smallcap Market due to the fact that our common stock has traded at a price below $1.00 per share for sustained period. To regain compliance with this listing requirement our common stock must trade at or above this price and we have been afforded a grace period to regain compliance with this requirement. However, there remains a risk that we may be unable to regain compliance within the permitted grace period and that our shares could be delisted from the Nasdaq Smallcap Market see Item 7 Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk FactorsRisks Related to Our Stock In order for our common stock to continue to be listed on The Nasdaq SmallCap Market, we must satisfy the Nasdaq SmallCap listing requirements, and there can be no assurance that we will be able to do so.
There were approximately 155 holders of record of our common stock as of January 4, 2005. We believe that a significant number of beneficial owners of our common stock hold their shares in street name. Based on information available to us, we believe we have at least 400 beneficial shareholders of our common stock.
We have neither declared nor paid cash dividends on our common stock in the past. We intend to retain future earnings, if any, to fund development and growth of our business and, therefore, do not anticipate that we will declare or pay cash dividends on our common stock in the foreseeable future
In connection with our merger with Poet, the holders of our then outstanding shares of Series A Preferred Stock had their outstanding shares of Series A Preferred Stock converted into shares of our common stock at an increased conversion rate of three shares (rather than two shares) of common stock per each share of Series A Preferred Stock. In addition, the exercise price of certain common stock purchase warrants held by such preferred shareholders was reduced from $2.13 to $1.66 per share and the term of such warrants was extended by one year. As a result of these actions a deemed dividend in the amount of approximately $2.4 million was recorded during the three months ended April 30, 2004. Please see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations -Deemed Dividend to the Preferred Shareholders.
Recent Sales of Unregistered Securities
On June 27, 2004, Versant entered into an Asset Purchase Agreement with JDO Genie (PTY) Ltd., a privately held South African corporation. Pursuant to this agreement, Versant purchased from JDO Genie a software product, related technology and customer agreements. As a portion of the purchase price of these assets, Versant agreed to issue to JDO Genie 230,150 shares of Versants common stock in a private transaction exempt from registration under the Securities Act, subject to approval of such issuance by the South African Reserve Bank under South Africas exchange control regulations within a certain time period, which Versant and JDO Genie extended by mutual agreement. The issuance of Versant common shares to JDO Genie was approved by the South African Reserve Bank on January 14, 2005 and Versant will issue these shares in reliance upon the exemption(s) from registration provided by Section 4(2), and/or Regulation S under the Securities Act
and/or Rules 505 or 506 of Regulation D promulgated under the Securities Act. In relying upon these exemptions Versant considered the fact the issuance of the shares is being made to a single foreign corporate purchaser who has been provided publicly available information about Versant and who was advised by legal counsel in connection with the transaction. Versant also considered that JDO Genie has made appropriate investment agreements and representations to Versant regarding its sophistication, knowledge, investment intent and compliance with resale restrictions applicable to restricted securities under the Securities Act. Versant has not agreed to register the shares issued to JDO Genie under the Securities Act.
Issuer Purchases of Equity Securities
No purchases of Versant securities were made by or on behalf of Versant in the fourth quarter of our fiscal year ended October 31, 2004.
Item 6. Selected Financial Data
The following selected consolidated financial data has been derived from our audited consolidated financial statements. The information set forth below is not necessarily indicative of results of our future operations, and should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes in this Form 10-K in order to fully understand factors that may affect the comparability of the information presented below and factors that might cause the following selected financial data not to be indicative of our future financial condition and results of operation. In particular, it should be noted that because we changed our fiscal year end from December 31 to October 31 in 2001, our transition period in 2001 was only a 10-month period, which impacts the comparability of the following financial data. In addition, in our fiscal year ended October 31, 2004 we completed our merger with Poet, which increased our revenues and operating expenses for part of fiscal 2004 and substantially increased the number of our outstanding shares at fiscal year-end for purposes of computing net loss per share in fiscal 2004. In fiscal 2004 we also incurred a restructuring charge of approximately $3.2 million as well as a charge of approximately $1.0 million related to the impairment of intangible assets. Each of these items in fiscal 2004 also affects the comparability of the following selected financial data:
As indicated in the paragraph above Item 1 in this report, this Form 10-K (including this Item 7) contains certain forward-looking statements within the meaning of the Securities Exchange Act and the Securities Act. In many cases you may identify these forward-looking statements by words such as will, should, may, might, believes, anticipates, expects, intends, estimates and similar expressions. These forward-looking statements include, among other things, projections of our future financial performance and trends anticipated for our business. We caution investors that forward-looking statements are only predictions or estimates based upon our current expectations about future events. The forward-looking statements are not guarantees of future performance and are subject to significant risks and uncertainties that are difficult to predict. Our actual results and performance may differ materially from the results and performance anticipated by any forward-looking statements due to these risks and uncertainties, some of which are discussed below in this Item 7 under the heading Risk Factors. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.
Certain Industry Terms
Listed below, for reference are 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 - Data management software that stores data as tables and columns and can be accessed using an industry standard language called SQL.
Application Server Software - Deployment software that is used to build and deploy Internet applications including commercial websites and company internal websites.
Cache - Performance enhancing software that works with servers to improve their response times and throughput.
Integration Framework - Bridging software that can connect two disparate pieces of software together.
XML - A standard format used to exchange data (information) between multiple software systems.
Object-Oriented - object oriented refers to software that uses smaller building blocks called objects to create larger software systems.
Data Integration - Data integration is a broad term for a variety of techniques that enable the data from one software system to be used in other software systems.
Replication - a range of technical approaches 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- a server that offers higher reliability by the use of duplicated hardware and specialized software. In the case of a failure of one database, the surviving database can continue offering normal service.
J2EE-based- An application or software component that is deployed in a Java 2 Enterprise Edition (J2EE) software environment.
Zero-administration - 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 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
We are a California corporation and were incorporated in August 1988. We design, develop, market and support high performance object database management, data access and data integration software systems and provide related services, and these products and services collectively comprise our single operating segment, Data Management.
Our data management product and services offer customers the ability to manage real-time, XML and other types of hierarchical and navigational data. Our combined suite of products and services cater to a wide range of customers with a wide variety of needs ranging from solutions for small devices, like remote controls, up to full-scale enterprise solutions, which manage hundreds of gigabytes of streaming 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.
On March 18, 2004 we finalized a merger in which we acquired Poet Holdings, Inc., or Poet. Poet brought two distinct lines of business to Versant. The first was Poets Data Management line of business, comprised of its FastObjects database product line. The second was Poets Catalog Solutions business, comprised of the X-Solutions and eSupplier Solutions products which we disclosed as a separate Catalog operating segment in our Forms 10-Q for the three months ended April 30, 2004 and July 31, 2004. While we intend to continue integrating Poets database product line into our existing product line to provide a broader suite of data management products, in September 2004 we concluded the sale of the Catalog Solutions line of business, thereby returning our business back to the single operating segment, Data Management, that existed prior to our merger with Poet.
On July 6, 2004 we acquired FastObjects Inc., the exclusive distributor of Poets database product line in North America, and on June 30, 2004 we acquired data access technology from JDO Genie (PTY) LTD, a privately held South African company.
Our Data Management business is currently comprised of the following products:
Versant Developer Suite, or VDS, a sixth generation object database management system that is used in high-performance large-scale real-time applications. Versant enJin has been replaced by VDS using VDSs Java Data Objects (JDO) language interface.
FastObjects, an object-oriented database management system that can be embedded as a high performance component into customers applications and systems, and
Versant Open Access, a software product that provides business application developers a powerful object storage tool. Versant Open Access is offered in versions for applications written in Java and Microsoft .NET environments. Versant JDO, a product we announced last year, and the technology we acquired in June 2004 from JDO Genie, have both been absorbed into the Versant Open Access family.
As previously disclosed in a Form 8-K filed on August 25, 2004, we recorded a non-cash charge in our statement of operations for the three months ended July 31, 2004 which represented the net book value of all assets associated with our Versant Real Time Framework product or VRTF. VRTF was launched in fiscal 2003, and was based on technology we acquired through our November 2002 acquisition of Mokume Software, Inc. While Versant believes that the need exists in the marketplace for a product such as VRTF, our primary operational focus since merging with Poet in March 2004 has been on integrating the two companies and leveraging their respective object database and data access product suites, with the goal of increasing Versants accessible market. We have determined that this objective requires priority and a greater dedication of resources within our organization such that we cannot distract or dilute our efforts in this regard by continuing with the more early stage real time initiative addressed by VRTF.
We license our products and sell associated maintenance, training and consulting services to end-users through our direct sales force and through value-added resellers, systems integrators and distributors. Services are an important aspect of our business, and in the fiscal years ended October 31, 2004, and October 31, 2003, a majority of our revenues were derived from services. In addition to these products and services, we resell related software developed by third parties. To date, substantially all of our revenue has been derived from the following data management products and services:
sales of licenses for 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 dedicated IBM WebSphere consulting practice) and training services;
nonrecurring engineering fees received in connection with providing services associated with VDS;
the resale of licenses, and maintenance, training and consulting services for third-party products that complement VDS; and
reimbursements received for out-of-pocket expenses we incurred that are booked as revenue in our statement of operations.
During fiscal 2004, our primary focus was on:
Concluding our acquisitions of Poet Holdings, Inc. FastObjects, Inc. and the data access technology from JDO Genie (PTY) LTD (which is a component of our Versant Open Access product line).
Integration activities surrounding these mergers, including the restructuring plan we announced during October 2004 aimed at streamlining our operations and minimizing redundancies in light of the above acquisitions.
Concluding the sale of our catalog business
However, we also maintained focus on: (i) sales and product development activities designed to obtain revenue growth from and enhance database our management products, and (ii) obtaining growth in our consulting service programs.
Although we showed overall revenue growth in 2004 compared with 2003, mainly due to our merger with Poet, our net loss for 2004 was $12 million comprised of the following:
The cost of our restructuring in 2004 was approximately $3.3 million. We expect this to yield future cost reduction benefits.
The conversion of Series A Preferred stock and the modification of the outstanding warrants held by our former Series A Preferred shareholders in conjunction with the Poet merger resulted in an inducement to these preferred shareholders, which was recorded as a deemed dividend in the amount of approximately $2.4 million in the three months ended April 30, 2004. This was a non-cash expense.
A non-cash charge in our statement of operations for the three months ended July 31, 2004 of approximately $1 million representing the net book value of all assets associated with our Versant Real Time Framework product or VRTF.
The catalog business incurred significant operating losses from the date of acquisition through to the date of sale. These operating losses together with the loss on the sale of this business accounted for approximately $2 million of our net loss in 2004 and
Approximately $3.3 million of the total net loss was due to the excess of other operating expenses and costs of revenue not mentioned above exceeding revenues as we proceeded through the integration activities surrounding our acquisitions.
For 2005 we expect that our principal sources of revenue will be licenses of VDS and FastObjects, as well as maintenance, support, training and consulting services and to a lesser extent license and service revenues from our Versant Open Access product. We expect the relative mix of our revenues between license, maintenance and professional services to be substantially the same in 2005 compared with 2004. We continue to experience significant quarterly fluctuations in total revenue and believe this trend will continue in 2004 and is similar to many companies in our industry.
Like many enterprise software companies, we do not operate with a significant backlog of orders. Our license revenue, in particular, is difficult to forecast and it is not atypical for a significant proportion of orders for a given quarter to be closed during the last month of that quarter. Information technology spending in general has been considerably depressed over the recent years and customers purchasing behavior has become more conservative. We expect lengthy sales cycles and customers preference for licensing our software on an as needed basis (versus the customer behavior we had seen in the late 1990s of prepaying license fees in advance of usage) to continue to be factors impacting our license revenues in 2005. The inherently unpredictable business cycle of an enterprise software company, together with the cautious macro-economic environment, makes discernment of meaningful business trends difficult. However in spite of this inherent uncertainty we expect overall revenues to grow in 2005 compared with 2004. We expect modest improvements in the North America region compared with our fiscal 2004, in part due to our July 2004 acquisition of FastObjects, Inc. We also expect that Europe will continue to contribute in excess of 30% of our total revenues in fiscal 2005 due to the acquisition of Poet, a company with primarily European business to date. We also expect some traction in the marketplace with our Versant Open Access product, although we expect revenues to be skewed more towards the second half of fiscal 2005. Consistent with the past three years, we expect technology, telecommunications and defense to be our largest vertical market sectors in 2005.
Our agreement with IBM (originally executed in year 2000), through which we are subcontracted to work on WebSphere consulting engagements, was amended in August 2003 to extend its term to September 1, 2004, and was again
amended in August 2004 to extend its term to September 1, 2005. We expect that this agreement will again be renewed in August or September of 2005; although such renewal will not by itself guarantee that we will be engaged by IBM to perform any particular level of services and thus will not assure us of any ongoing level of revenue from IBM (nor have there been any guarantees of this nature in the past). However, we expect utilization of our Websphere consulting practice to improve over 2004 (primarily due to lower than normal utilization rates in our quarter ended July 31, 2004) and be more in line with utilization levels in 2003. We also expect increased professional services engagements in relation to our FastObjects product line.
We expect gross margin percentages to improve slightly over 2004 with expected revenue growth offset to an extent by increased amortization of purchased intangibles compared with 2004.
Overall, we expect operating expenses in 2005 to decrease compared with 2004. We expect marketing and sales expense and research and development expense in 2005 to return to similar levels to those in 2003, largely due to the restructuring plan we committed to in October 2004. Overall average engineering headcount levels in 2004 were consistent with 2003 though the geographic distribution was adjusted in light of the direct engineering staff we now have in Hamburg, Germany as result of the merger with Poet. This gives us the advantage of a skilled regional engineering element closer to the European market and customers, and is additionally a more cost-effective model. We expect to increase staffing in our Indian operation over the course of 2005. We expect general and administrative expense to increase in 2005, primarily due to the estimated cost of implementation and compliance with Sarbanes Oxley 404 requirements. We need to comply with this legislation for our year ended October 31, 2005, and we expect to incur significant third party consulting costs in assisting us to become compliant and increased audit fees related to the year-end attestation our auditors will have to perform on the effectiveness of our internal controls.
Critical Accounting Policies
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 are reasonable under the circumstances, there can be no assurances that our 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, impairment of long-lived assets, the determination of our reserve for doubtful accounts and stock-based compensation.
We recognize revenue in accordance with the provisions of Statement of Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. Revenue consists mainly of revenue 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 revenue 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 revenue based on vendor-specific objective evidence, or 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, we defer all revenue 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 the value of such undelivered elements. We typically do not offer discounts on future undeveloped products.
Revenue from software license arrangements, including prepaid license fees, is 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.
Fee is fixed and determinable. If we cannot conclude that a fee is fixed and determinable, then assuming all other criteria have been met, revenue is recognized as payments become due in accordance with paragraph 29 of SOP 97-2; and
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 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 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. In addition, the volume of extended payment term arrangements has dramatically reduced since fiscal 2000 consistent with customers adopting a more conservative approach to software purchases and their reluctance to prepay for licenses prior to usage. We typically do not grant extended payment terms beyond one year.
If an acceptance period or other contingency exists, revenue is not recognized until satisfaction of the contingency, customer acceptance or expiration of the acceptance period, as applicable. Our license fees are non-cancelable and non-refundable and we do not make concessions or grant a refund 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 our software. Therefore a customers delay or acceleration in his deployment schedule does not impact our revenue recognition. Revenue from related PCS for all product lines (with the exception of deployments of FastObjects products) is billed in advance of the service being provided and is deferred and recognized on a straight-line basis over the term of the PCS, which is generally twelve months. PCS revenue from deployments of the FastObjects product line is paid in arrears of the service being provided and is recognized as revenue at the time the customer provides a report to us for deployments made during a given period. Training and consulting revenue is 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). Our End User customers are companies who use our products internally and do not redistribute the product outside of their corporate organizations. Our VAR customers include traditional Value Added Resellers, Systems Integrators, OEMs and other vendors who redistribute our products to external third party customers, either individually or as part of an integrated product. We license our data management products through two types of perpetual licensesdevelopment licenses and deployment licenses.
Development licenses are typically sold on a per seat basis and authorize a customer to develop an application program that uses our software product.
Before an End User customer may 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 VDS and FastObjects varies according to several factors, including the number of computer servers on which the application will run and the number of users that will be 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 VARs 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 application software 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, revenue is 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.
Revenue from our resale of third-party products is recorded at total contract value with the corresponding cost included in cost of sales when we act as a principal in these transactions and we assume 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, revenue from our resale of third-party products or services is recorded at contract value net of the cost of sales.
In the rare case that a customer requests engineering work for porting our product to an unsupported platform or customization of our software for specific functionality, or any other non-routine technical work, we recognize revenue in accordance with SOP 81-1 and use either the percentage of completion or completed contract methods for recognizing revenue. 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 buyer can be expected to satisfy his obligations under the contract.
Versant can be expected 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 revenue until such time as the work has been completed.
Goodwill and Acquired Intangible Assets
We account for purchases of acquired companies in accordance with Statement of Financial Accounting Standards No. 141 Business Combinations (SFAS 141) and account for the related acquired intangible assets in accordance with SFAS No. 142 Goodwill and Other Intangible Assets (SFAS 142). In accordance with SFAS 141, we allocate the cost of the acquired companies to the identifiable tangible and intangible assets acquired according to their respect 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 at the acquisition date.
For the purpose of testing for goodwill impairment in our single Data Management operating segment we have aggregated the goodwill for the following acquisitions:
Versant Europe, acquired in 1997;
Poet, acquired on March 18, 2004;
Technology of JDO Genie, acquired on June 30, 2004; and
FastObjects, Inc., acquired on July 6, 2004.
We filed a Form 8-K on August 25, 2004 reporting our assessment that the carrying value of intangible assets and goodwill acquired through our acquisition of Mokume Software Inc., in November 2002 had been fully impaired. Consequently, for the quarter ended July 31, 2004 we recorded a charge of approximately $1.0 million related to the write-off of remaining Mokume intangible assets and goodwill.
We test goodwill for impairment in accordance with SFAS 142, which requires that goodwill be tested for impairment at the reporting unit level (which in our case is at the consolidated company 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 (as indicated by our publicly traded share price and shares outstanding plus a control premium), debt and current 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 a memo allocation of the reporting units estimated fair value to its assets and liabilities as though the reporting unit had just been acquired in a business combination is required. The impairment loss is the amount, if any, by which the implied fair value of goodwill is less than that reporting units goodwill carrying amount and would be recorded in earnings 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 the merger with Poet, using the straight-line method in each of these cases.
Impairment of Long-Lived Assets
We evaluate long-lived assets, including intangible assets other than goodwill, for impairment in accordance with the provisions of SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 requires that long-lived assets and intangible assets other than goodwill be evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The recoverability test compares the carrying amount of the asset or asset group to the expected undiscounted net cash flows to be generated by these assets. If the carrying amount of the asset or asset group is less than the expected undiscounted net cash flows to be generated by these assets, an impairment loss is recorded in earnings during the period of such impairment and is calculated as the excess of the carrying amount of the asset or asset group over its estimated fair value.
Reserve for Doubtful Accounts
We initially record our provision for doubtful accounts based on historical experience and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider, among other factors: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable (i.e. license, consulting, maintenance, etc.); (iv) our historical provision for doubtful accounts; (v) the credit-worthiness of each customer; (vi) the economic conditions of the customers industry; and (vii) general economic conditions.
Should any of these factors change, the estimates made by management will also change, which could impact the level of our future provision for doubtful accounts. Specifically, if the financial condition of our customers were to deteriorate, affecting their ability to make payments, an additional provision for doubtful accounts may be required. A number of our customers are in the telecommunications industry and, as part of our evaluation of the provision for doubtful accounts, we have considered not only the economic conditions in that industry but also the financial condition of our customers in that industry in determining the provision for doubtful accounts. If conditions deteriorate further in that industry, or any other industry, then an additional provision for doubtful accounts may be required.
Non-Cash Stock Expense
We have elected to continue to account for employee stock-based compensation plans using the intrinsic value method, as prescribed by APB No. 25 Accounting for Stock Issued to Employees and interpretations thereof (collectively APB 25) rather than the fair value method prescribed by SFAS No. 123 Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS 148. Accordingly, deferred compensation is only recorded if the current price of the underlying stock exceeds the exercise price on the date of grant. We record and measure deferred compensation for stock options granted to non-employees at their fair value. Deferred compensation is expensed over the vesting period of the related stock option, which is generally up to four years.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation and superseding APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires the Company to expense grants made under the Companys stock option program. That cost will be recognized over the vesting period of the plans. SFAS No. 123R is effective for interim periods beginning after June 15, 2005. Upon adoption of SFAS No. 123R, amounts previously disclosed under SFAS No. 123 will be recorded in the Companys statement of operations. The Company is evaluating the alternatives allowed under the standard, which the Company is required to adopt effective for its fourth quarter of fiscal 2005.
Results of Operations
Our fiscal 2004 acquisitions of Poet, the JDO Genie assets and FastObjects, Inc. became effective on March 18, 2004, June 30, 2004 and July 6, 2004, respectively. Our consolidated statement of operations for our 2004 fiscal year incorporates the results from the effective dates of the respective acquisitions. References in this section to any year (such as 2003 or 2004) refer to our fiscal year ended on October 31 of that year.
There are three major components in our income statement for the twelve months ended October 31, 2004, namely:
1. Results from continuing operations; this is comprised of revenues and expenses in our on-going data management operating segment and specifically excludes all results of the discontinued Catalog business.
2. Deemed dividend to preferred shareholders; The conversion of Series A Preferred stock and the modification of the outstanding common stock warrants held by our former series A preferred shareholders in connection with our merger with Poet resulted in an inducement to the preferred shareholders which was reflected as a deemed dividend in our income statement for 2004. Please see the paragraph entitled Deemed Dividend to the Preferred Shareholders below for more detail.
3. Results from discontinued operations; this is comprised of Catalog business revenues and expenses and the loss on sale of our Catalog business (sold in September 2004). Please see the paragraph entitled Discontinued Operations below for more detail.
All subsequent discussion of our revenues, cost of revenues and operating expense line items in this Item 7 refer only to continuing operations, all of which are in our data management segment.
Our revenue consists of license fees, maintenance fees (which includes technical and phone support), and fees for professional services (which includes Versant consulting, our IBM WebSphere practice, training and related billable travel expense).
Our international sales are made at the foreign currency equivalent of a U. S. dollar based price. An increase or decrease in the value of the United States dollar relative to foreign currencies could make our products more or less expensive, respectively, and, therefore impact our competitiveness in foreign markets. We intend to maintain our sales and marketing
activities outside the United States, which include supporting our subsidiaries, distributors and resellers in Europe, Japan and other Asia/Pacific countries. This will require significant management attention and financial resources, and may increase costs and impact margins unless and until corresponding revenue is achieved.
Fiscal 2004 Compared to Fiscal 2003
The relative mix of our revenues between license, maintenance and professional services revenue in 2004 was substantially the same year over year. Geographically, our North American revenues declined and under-performed compared with expectations, especially for the two consecutive quarters, ended April 30, and July 31, 2004. We attribute this outcome more to cautious purchasing behavior in the region rather than a discernable trend away from using Versants technology. European revenues grew significantly, primarily due to our merger with Poet, although revenues from Versants core data management products also grew in this region.
For the last two years, the technology sector has been our largest revenue source. The incorporation of Versant products into the application offerings of independent software vendors (ISVs) such as PeopleSoft and Borland and increasing sales of the ISVs products have increased license revenue in this sector. Examples of these applications are demand consensus forecasts, collaborative planning, and requirements management. In addition, the growth of the Versant WebSphere Professional Services practice since its inception in year 2000 has increased the amount of our business in the technology sector because of increasing adoption of WebSphere by technology companies.
The telecommunications industry continues to be a very significant vertical market sector for us. Our products are used in the telecommunications industry in such strategic distributed applications as network modeling and management, fault diagnosis, fraud prevention, service activation and assurance, and customer billing. Defense sector revenue was down in 2004, but we attribute this more to the erratic purchasing behavior and lengthy sales cycles of our defense customers and sub contractors rather than an indication of a meaningful revenue trend.
Fiscal 2003 Compared to Fiscal 2002
The relative mix of our revenues between license, maintenance and professional services in 2003 was more heavily weighted toward professional services revenue and less towards license revenue than in 2002 due to the growth in our WebSphere consulting practice in 2003 and the lower license transaction volume in 2003 compared with 2002. Geographically, both our European and Asian revenues declined in absolute and relative terms. We believe that these declines resulted from the economic downturn during this period, which has had a more marked effect on international sales than on domestic sales, particularly in Europe, and especially as it applied to the telecommunications industry.
The technology sector was the biggest contributor to the increase in 2003 revenues, largely attributable to the growth in our WebSphere consulting practice revenues. Telecommunications customers represented 26% of total revenues in 2003 and continue to be a significant vertical market for Versant, although this sector was down compared with 2002 and with historical norms for Versant, reflecting the ongoing economic challenges in that industry. Defense sector revenue was consistent with 2002 in both absolute and percentage terms.
License revenue represents perpetual license fees received from our end user and value added reseller customers and recognized in our statement of operations in accordance with SOP 97-2. Cost of license revenue consists primarily of product royalty obligations incurred by us when we sublicense tools provided by third parties and costs of reselling third party products and secondarily of costs of user manuals, product media, production labor costs, freight and packaging.
Fiscal 2004 Compared to Fiscal 2003
The net increase in license revenue of approximately $600,000 in 2004 over 2003 was comprised of an approximate $1.9 million license revenue contribution from Poet products, which was primarily generated in Europe, offset by an approximate $1.3 million decrease in Versants core data management license sales. Much of this shortfall was attributable to weakness in the US / APAC Value Added Reseller (VAR) channels in the second and third quarters of 2004. Resale of third party products was 1% of total license revenue in 2004 down considerably from the 8% we experienced in 2003.
Cost of license revenue decreased by approximately $400,000 primarily due to approximately $500,000 lower cost of resold licenses compared with 2003 and offset by approximately $100,000 in higher product royalty payments compared to last year.
License margins improved by 4% in 2004, due to the fact that our revenue mix included fewer revenues from lower margin resales of third party products.
Fiscal 2003 Compared to Fiscal 2002
License revenue in 2003 decreased 10% to $9.1 million from $10.1 million in 2002, primarily due to lower transaction volume rather than price pressure. Lengthy sales cycles and customers preference for licensing our software on an as needed basis versus the historical practice of prepaying license fees in advance of usage were factors adversely affecting our license revenues, as was the macroeconomic environment, especially as it pertained to the telecommunications industry. Resale of third party products was 8% of total license revenue in 2003 with the remainder being primarily sales of Versants core database product, VDS.
Cost of license revenue decreased 7% in 2003 to approximately $800,000 compared to approximately $900,000 in 2002. This net year over year decline of approximately $100,000 was primarily due to decreased license sales volume.
License margins remained constant at 91%.
Maintenance and technical support
Maintenance and technical support revenue includes revenue derived from maintenance agreements under which we provide customers with internet and telephone access to support personnel and software upgrades, dedicated technical assistance and emergency response support options. It also includes maintenance revenue on the resale of third party products. Cost of maintenance and technical support revenue consists principally of personnel costs associated with providing technical support
Fiscal 2004 Compared to Fiscal 2003
The increase in revenue of approximately $700,000 in 2004 compared with 2003 was comprised principally of the addition of Poets maintenance and support contracts that were primarily executed in Europe while maintenance revenue from Versants VDS customers in 2004 remained at levels similar to those of 2003.
Cost of maintenance and technical support revenue increased, primarily as a result of the addition of Poets customer support organization in Europe.
Maintenance and technical support margins remained unchanged with 2003.
We exited the year with 8 maintenance and technical support employees worldwide (5 in North America and 3 in Europe).
Fiscal 2003 Compared to Fiscal 2002
Maintenance and technical support revenues increased 15% to $6.1 million in 2003 from $5.3 million in 2002. This increase was primarily due to an increase in maintenance pricing on new license deals, which mitigated the impact of reduced license sales, and also our continued efforts to bring the installed customer base current on their maintenance contracts for customers that were running older versions of our software.
Cost of maintenance and technical support revenue increased slightly due to salary cost, though total headcount levels did not change year over year.
Maintenance and technical support margins improved slightly, with revenue increases exceeding the nominal increase in expense.
Professional services revenue consists of revenue from consulting, training and technical support as well as billable travel expenses incurred by our service organization. Cost of professional services revenue consists principally of personnel costs (both employee and sub-contractor) associated with providing consulting and training. Cost of revenues from professional services may vary depending on whether such services are provided by Versant personnel or by typically more expensive sub-contracted third party consultants.
Fiscal 2004 Compared to Fiscal 2003
The decrease in revenues of approximately $500,000 in professional services revenue in 2004 compared with 2003 was comprised primarily of a decrease in Versants WebSphere consulting revenue. This decrease was due to lower utilization rates in this practice, especially in our quarter ended July 31, 2004, as some long-term engagements concluded and our consultants transitioned onto new engagements. WebSphere consulting represented 60% of total professional services revenue for 2004 compared with 62% for 2003.
Cost of professional services revenue decreased in 2004 by approximately $200,000 due to lower headcount and related costs of approximately $300,000, offset by approximately $100,000 of increased subcontracted consulting costs as some of our employees transitioned to subcontractor status.
Professional services margins decreased 4% in 2004, with revenue reductions outpacing cost decreases.
We exited the year with 19 professional services employees worldwide, comprised of 13 in North America and 6 in Europe.
Fiscal 2003 Compared to Fiscal 2002
Professional services revenue increased 52% to $6.9 million in 2003 from $4.6 million in 2002, with approximately $1.6 million of the total increase coming from the growth in our Websphere practice with the remaining $700,000 due to the growth in Versants consulting practice. WebSphere consulting represented 62% of total professional services in 2003 compared with 60% of the total in 2002.
Cost of professional services revenue increased 49% to $6.0 million in 2003 from $4.0 million in 2002 mainly due to the increased volume of subcontracted consulting resources required to support the increased sale volume.
Professional services margins improved by 2% in 2003 despite increased usage of subcontracted labor due to higher utilization rates for our professional services.
Gross Profit Margins
The key factors that cause variations in our gross profit are:
The mix of our product sales, as this directly impacts our total costs of revenue. In general, a higher proportion of license revenue will result in lower relative total costs of revenue and thus higher gross profit margins. Our maintenance revenues have the next lowest associated costs, with consulting revenues attracting the highest costs.
Amortization of intangible assets associated with our acquisitions please see the paragraph entitled Amortization of Purchased Intangibles below.
Fiscal 2004 Compared to Fiscal 2003
Our gross profit improved by 4% in absolute terms in 2004 compared with 2003, consistent with the increased sales volume in 2004.
Amortization of purchased intangibles, a non-cash expense that is related to the acquisitions we consummated in 2004, had a significant impact on our gross profit for 2004 (particularly due to the merger with Poet) and will continue to have this impact in 2005. Amortization of purchased intangibles was approximately 3% of total revenue in 2004 compared with less than 1% of revenue in 2003.
Fiscal 2003 Compared to Fiscal 2002
Our gross profit increased in absolute terms primarily due the increased professional services revenue described above, but declined in percentage terms due to higher margin license revenues being a smaller percentage of the overall product mix in 2003 compared with 2002, with the increase in the mix taken up by lower margin professional services.
Amortization of Purchased Intangibles
In accordance with SFAS 141, we allocate the cost of companies and technology we acquire 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 and customer relationships are amortized to expense over time. Our 2004 statement of operations has been charged with the amortization of the customer relationship assets acquired in the Poet and FastObjects Inc. transactions and the developed technology assets acquired in the Poet, JDO Genie (PTY) LTD. and Mokume transactions as follows:
The following table shows how our existing intangible assets as of October 31, 2004 will be amortized to our consolidated statements of operations in future years, assuming no impairment of these intangible assets:
Note (1): As reported in our Form 8-K filing on August 25, 2004 we wrote off the entire carrying value of all intangible assets and goodwill in relation to our acquisition of Mokume Software, Inc. in our consolidated statement of operations for the three months ended July 31, 2004, due to our assessment of impairment.
Note (2): As reported in our Form 8-K filing on August 25, 2004, we reduced the carrying value of identifiable intangible assets attributable to the catalog solutions business by approximately $1.4 million on our balance sheet as of July 31, 2004, which reduced the carrying value of these assets to approximately $1.5 million. Then on September 13, 2004, we filed a Form 8-K reporting that Poet, a wholly owned subsidiary of Versant, had executed a definitive agreement with ems ePublishing AG (EMS), a privately held company based in Karlsruhe, Germany, for the sale of the catalog solutions business. This sale was effected through a sale of all Poet GmbHs share capital to EMS. Pursuant to this sale, EMS assumed all assets (tangible and intangible) and all liabilities of Poet GmbH. Consequently, the remaining balance of approximately $1.5 million attributable to the identifiable intangible assets of the catalog solutions business was written off entirely in our consolidated statement of operations for the three months ended October 31, 2004 and reported as part of loss from sale of discontinued operations (please see the paragraph entitled Discontinued Operations below for more detail). For fiscal 2005 onwards the amortization of intangible assets acquired in the merger with Poet Holdings will relate only to the data management assets we acquired from Poet.
Marketing and Sales Expenses
Marketing and sales expenses consist primarily of marketing and sales labor costs, sales commissions, and expenses from recruiting, business development, travel, advertising, public relations, seminars, trade shows, lead generation, marketing and sales literature, product management, and facilities related expenses.
Fiscal 2004 Compared to Fiscal 2003
The 2004 increase in marketing and sales expense of approximately $300,000 is comprised of approximately $800,000 attributable to the addition from Poets marketing and sales organization in Europe, offset by an approximately $500,000 reduction in Versants pre-existing marketing and sales organization. In 2004 we carried out marketing and sales headcount reductions in both North America and Europe and reduced commission expense in North America due to lower revenue levels in Versants core data management products in that region. Average headcount during 2004 was in line with 2003 on a worldwide basis but with European headcount slightly up and North American headcount slightly down compared with 2003. We exited the year with 27 marketing and sales employees worldwide consisting of 13 in North America and 14 in Europe.
Fiscal 2003 Compared to Fiscal 2002
Marketing and sales expense decreased 2% in 2003 to $7.7 million from $7.9 million in 2002. This decrease was the result of lower commission expense corresponding with the lower license revenue in 2003.
Research and Development Expenses
Research and development expenses consist primarily of salaries, recruiting and other employee-related expenses, depreciation, and expenses associated with development tools, equipment, supplies and travel. We believe that a significant level of research and development expenditures is required to remain competitive and to timely complete products under development. Accordingly, we anticipate that we will continue to devote substantial resources to research and development to design, produce and increase the quality, competitiveness and acceptance of our products. However, if we continue our research and development efforts without corresponding increases in revenue, our results of operations would be adversely affected. To date, all research and development expenditures have been expensed as incurred.
Fiscal 2004 Compared to Fiscal 2003
The increase of approximately $800,000 in research and development expense in 2004 was due primarily to the addition of Poets research and development organization in Europe (approximately $700,000 of the increase) and secondarily due to engineering work contracted to a third party in China (approximately $100,000 of the increase). Average headcount in our research and development organization during 2004 was down slightly compared with 2003 on a worldwide basis, however the geographic mix of employees in this organization was different. We reduced headcount slightly in North America in efforts to control costs and we experienced turnover and inflationary pressures on salaries in our Indian organization in a similar fashion to many high tech employers in that region. We exited the year with 47 research and development employees worldwide comprised of 9 in North America, 12 in Europe and 26 in India.
Fiscal 2003 Compared to Fiscal 2002
Research and development expenses decreased 26% in 2003 to $4.3 million from $5.8 million for 2002, primarily due to reduction of headcount made in conjunction with cost reduction efforts.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and other employee related costs for our finance, human resources, legal and executive management functions. In addition, general and administrative expenses include outside legal, audit and public reporting costs, allocated facilities costs and reserves for estimated bad debts.
Fiscal 2004 Compared to Fiscal 2003
The increase of $1.2 million is comprised of approximately $800,000 attributable to the addition of Poets general and administrative organization in Europe, approximately $300,000 of higher legal, accounting and consulting costs resulting primarily from our merger and acquisition activities and approximately $100,000 for executive bonuses. Our average total worldwide headcount during 2004 was higher compared with 2003 due primarily to the accounting and information technology staff we assumed in the Poet merger. We closed 2004 with 25 general and administrative employees worldwide. Some of these employees were employed on a part-time basis yielding the equivalent of 21 full-time employees worldwide comprised of 10 in North America and 11 in Europe.
Fiscal 2003 Compared to Fiscal 2002
General and administrative expenses decreased 5% to $3.3 million in 2003 from $3.4 million in 2002 primarily due to reduced bad debt expense, a major component of which was the collection of a previously reserved European receivable.
During the second quarter of fiscal 2004, we implemented a restructuring plan aimed at optimizing performance in our catalog business that was acquired as part of the merger with Poet. The primary goal was to reduce operating expenses to more appropriately align them with sustainable revenue levels. As a result, we incurred costs related to employee severance payments, related benefit and outplacement expenses totaling approximately $400,000 that were recorded as restructuring costs in operating expenses during the second and third quarters of fiscal 2004. Given that our catalog business was acquired in September 2004 by EMS and EMS assumed all assets, liabilities and employees of the catalog business, all obligations under this restructuring plan have been fulfilled as of October 31, 2004.
During October 2004 we committed to an additional restructuring plan to take the following actions in an effort to reduce operating expenses in our data management business:
The Company took these actions in order to streamline its operations and minimize redundancies in light of its acquisitions of Poet Holdings, Inc., FastObjects, Inc. and the assets of JDO Genie (PTY) LTD during 2004 and in general to reduce ongoing operating expenses in an effort to improve operating results and conserve working capital. The Company completed these actions by October 31, 2004 and no additional charges related to these actions are anticipated in fiscal 2005.
Impairment of Intangibles
As disclosed in a Form 8-K we filed on August 25, 2004, our evaluation of our intangible assets carried out in the course of preparing our balance sheet as of July 31, 2004 (the close of our third fiscal quarter), indicated impairment in the carrying value of the goodwill and intangible assets related to our acquisition of Mokume Software, Inc., in November 2002. Consequently, in the three months ended July 31, 2004, we recorded a non-cash charge of approximately $1.0 million comprised of approximately $300,000 in unamortized intangible assets and approximately $700,000 of goodwill that represents the net book value of all recorded Mokume intangible assets as of July 31, 2004.
Non-Cash Stock Expense