POET HOLDINGS INC - 10-Q Quarterly Report

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)

[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2002

OR

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from __________ to __________

Commission file number: 333-87267

POET HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		94-3221778 (I.R.S. Employer Identification No.)

999 BAKER WAY, SUITE 200
SAN MATEO, CALIFORNIA 94404
(650) 577-2500

(Address, including zip code, of Registrant’s principal executive offices and telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 [X] NO [ ]

The number of shares outstanding of the Registrant’s Common Stock on June 30, 2002 was 10,888,646 shares.

TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION
	ITEM 1 FINANCIAL STATEMENTS
		UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II: OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 99.1

POET HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q

INDEX


		PAGE

PART I:	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Unaudited Condensed Consolidated Balance Sheets — June 30, 2002 and December 31, 2001		3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss — Three and Six months ended June 30, 2002 and 2001		4
	Unaudited Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2002 and 2001		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		13
PART II:	OTHER INFORMATION		13
Item 1.	Legal Proceedings		14
Item 2.	Changes to Securities and Use of Proceeds		14
Item 3.	Defaults Upon Senior Securities		14
Item 4.	Submission of Matters to a Vote of Security Holders		14
Item 5.	Other Information		14
Item 6.	Exhibits and Reports on Form 8-K		15
SIGNATURES

Note Regarding Forward Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements that relate to future events or future financial performance. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or “continue,” or the negative of such terms or other comparable terminology. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those listed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors” in Poet Holding’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 as filed with the SEC. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements.

PART I: FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

POET HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)


			June 30,			December 31,
			2002			2001

Assets
Current assets:
	Cash and equivalents		$	7,853		$	10,905
	Short-term investments			9,257			10,899
	Accounts receivable (net of allowances of $450 and $508 in 2002 and 2001, respectively)			1,788			1,993
	Inventories and other current assets			349			450

		Total current assets		19,247			24,247
Property, furniture and equipment, net				1,091			1,074
Other assets				552			317

Total assets			$	20,890		$	25,638

Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable		$	950		$	582
	Accrued liabilities			1,521			1,564
	Deferred revenue			861			890
	Current portion of debt			—			57

		Total current liabilities		3,332			3,093

Stockholders’ equity:
	Preferred stock, $0.001 par value; 3,000,000 shares authorized; no shares outstanding			—			—
	Common stock, $0.001 par value; 100,000,000 shares authorized
	Shares outstanding: 2002 - 10,888,646; 2001 - 10,876,912;			11			11
	Additional paid-in capital			66,341			66,331
	Deferred stock compensation			(75	)		(126	)
	Accumulated deficit			(49,174	)		(43,954	)
	Accumulated other comprehensive income			455			283

		Total stockholders’ equity		17,558			22,545

Total liabilities and stockholders’ equity			$	20,890		$	25,638

See Notes to Unaudited Condensed Consolidated Financial Statements

POET HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


			Three Months Ended June 30,						Six Months Ended June 30,

			2002			2001			2002			2001

Revenues:
	Product		$	1,219		$	1,974		$	2,629		$	3,764
	Consulting and training			265			352			593			816
	Support and maintenance			477			479			907			974

Total revenues				1,961			2,805			4,129			5,554

Operating expenses:
	Cost of product			148			58			240			124
	Cost of consulting and training			372			319			679			579
	Cost of support and maintenance			386			302			750			621
	Selling and marketing			2,161			3,350			4,463			7,430
	Research and development			1,121			1,028			2,042			2,174
	General and administrative			713			820			1,378			1,685
	Amortization of deferred stock compensation(*)			26			56			52			112

		Total operating expenses		4,927			5,933			9,604			12,725

Operating loss				(2,966	)		(3,128	)		(5,475	)		(7,171	)

Other income (expense):
	Interest expense			—			(5	)		(1	)		(14	)
	Interest income and other, net			164			279			301			754

	Total other income (expense), net			164			274			300			740

Loss before income taxes				(2,802	)		(2,854	)		(5,175	)		(6,431	)
Income tax expense				(19	)		—			(45	)		(39	)

Net loss			$	(2,821	)	$	(2,854	)	$	(5,220	)	$	(6,470	)

Other comprehensive income (loss)				249			(115	)		172			(288	)

Comprehensive loss			$	(2,572	)	$	(2,969	)	$	(5,048	)	$	(6,758	)

Basic and diluted net loss per share (Note 3)			$	(0.26	)	$	(0.26	)	$	(0.48	)	$	(0.60	)

Shares used in computing basic and diluted net loss per share				10,881			10,818			10,879			10,806

(*) Amortization of deferred stock compensation
Cost of consulting and training			$	3		$	6		$	6		$	12
Cost of support and maintenance				1			3			2			5
Selling and marketing				12			25			23			49
Research and development				7			16			15			33
General and administrative				3			6			6			13

			$	26		$	56		$	52		$	112

See Notes to Unaudited Condensed Consolidated Financial Statements

POET HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)


				Six Months Ended June 30,

				2002			2001

Cash flows from operating activities:
Net loss				$	(5,220	)	$	(6,470	)
	Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization				399			340
	Amortization of deferred stock compensation				52			112
	Amortization of investment discounts				(178	)		(271	)
	Changes in assets and liabilities:
		Accounts receivable			370			943
		Inventories and other current assets			126			(49	)
		Other assets			(35	)		(112	)
		Accounts payable and accrued liabilities			221			(377	)
		Deferred revenue			(55	)		47

			Net cash used in operating activities		(4,320	)		(5,837	)
Cash flows from investing activities:
	Purchases of property, furniture and equipment				(336	)		(446	)
	Proceeds from sales and maturities of investments				10,000			19,599
	Investment in unconsolidated company				(169	)		—
	Purchases of investments				(8,167	)		(13,000	)

			Net cash provided by investing activities		1,328			6,153
Cash flows from financing activities:
	Repayments of debt				(63	)		(112	)
	Common stock issued, net of issuance costs				10			89

			Net cash used in financing activities		(53	)		(23	)
Effect of exchange rate changes on cash and equivalents					(7	)		(112	)

Increase (decrease) in cash and equivalents					(3,052	)		181
Cash and equivalents — beginning of period					10,905			18,747

Cash and equivalents — end of period				$	7,853		$	18,928

Supplemental disclosure of cash flow information:
	Interest paid			$	—		$	9

	Taxes paid			$	36		$	47

See Notes to Unaudited Condensed Consolidated Financial Statements

POET HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(UNAUDITED)

1. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary (consisting of normal, recurring adjustments) for a fair presentation of Poet’s financial position as of June 30, 2002, the results of operations and comprehensive loss for the three and six month periods ended June 30, 2002 and 2001 and cash flows for the six month periods ended June 30, 2002 and 2001.

The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2002. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 as filed with the SEC.

2. BALANCE SHEET COMPONENTS

INVESTMENTS

Investments with original maturities greater than three months and with maturities less than one year from the balance sheet date are classified as short-term investments. Investments with maturities one year or greater from the balance sheet date are classified as long-term investments. The Company accounts for investments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” The Company’s policy is to protect the value of its investment portfolio and to minimize principal risk by earning returns based on current interest rates. The Company has classified all of its investments as available-for-sale securities. While the Company’s practice is to hold debt securities to maturity, the Company has classified all debt securities as available-for-sale securities, as the sale of such securities may be required prior to maturity to implement management strategies. The carrying value of all securities is adjusted to fair market value, with unrealized gains or losses being excluded from earnings and reported as a separate component of stockholder’s equity. Cost is based on the specific identification method for purposes of computing realized gains and losses.

Investments include the following available-for-sale securities at June 30, 2002 (in thousands):


				Gross		Gross			Estimated
		Amortized		Unrealized		Unrealized			Fair
		Cost		Gains		Loss			Value

Money market funds		$	811	$	—	$	—		$	811
Foreign Time Deposits			1,206		63					1,269
Commercial paper			9,494		—		(8	)		9,486
U.S. government agencies			3,986		6		—			3,992

	Total available-for-sale securities	$	15,497	$	69	$	(8	)	$	15,558

Included in cash and cash equivalents		$	6,306	$	—	$	(5	)	$	6,301
Included in short-term investments			9,191		69		(3	)		9,257

	Total available-for-sale securities	$	15,497	$	69	$	(8	)	$	15,558

Investments include the following available-for-sale securities at December 31, 2001 (in thousands):


				Gross		Gross			Estimated
		Amortized		Unrealized		Unrealized			Fair
		Cost		Gains		Loss			Value

Money market funds		$	1,143	$	—	$	—		$	1,143
Commercial paper			12,983		4		(6	)		12,981
U.S. government agencies			6,920		4		(16	)		6,908

	Total available-for-sale securities	$	21,046	$	8	$	(22	)	$	21,032

Included in cash and cash equivalents		$	10,139	$	—	$	(6	)	$	10,133
Included in short-term investments			10,907		8		(16	)		10,899

	Total available-for-sale securities	$	21,046	$	8	$	(22	)	$	21,032

At June 30, 2002 and December 31, 2001, the company had $1,552,000 and $772,000, respectively, of cash and equivalents excluded from the total available-for-sale securities balances above.

3. NET LOSS PER SHARE

The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands, except per share amounts):


		THREE MONTHS ENDED						SIX MONTHS ENDED
		JUNE 30,						JUNE 30,

		2002			2001			2002			2001

Net loss (numerator), basic and diluted		$	(2,821	)	$	(2,854	)	$	(5,220	)	$	(6,470	)
Shares (denominator):
	Weighted average common shares outstanding		10,881			10,833			10,879			10,826
	Weighted average common shares outstanding subject to repurchase		—			(15	)		—			(20	)

Shares used in computing basic and diluted net loss per share			10,881			10,818			10,879			10,806

Net loss per share basic and diluted		$	(0.26	)	$	(0.26	)	$	(0.48	)	$	(0.60	)

For the above mentioned periods, the Company had securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share in the periods presented, as their effect would have been antidilutive. Such outstanding securities consist of the following:


	SIX MONTHS ENDED
	JUNE 30,

	2002		2001

Shares of common stock subject to repurchase		—		12,857
Outstanding options		1,660,572		1,172,728
Warrants		55,739		55,739

Total		1,716,311		1,241,324

Weighted average exercise price of options	$	8.69	$	21.32

Weighted average exercise price of warrants	$	6.88	$	6.88

4. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS

The Company operates in one reportable segment, the development and marketing of software products that allow businesses to share and manage complex information and facilitate effective business-to-business processes and information exchange over the Internet. The Company principally operates in the U.S. and Germany. The following is a summary of operations within geographic areas (in thousands):


	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,

	2002		2001		2002		2001

Revenues(1):
United States	$	963	$	1,444	$	1,894	$	2,776
Germany		998		1,361		2,235		2,778

	$	1,961	$	2,805	$	4,129	$	5,554

(1)

Revenues are broken out geographically by the ship-to location of the customer.


	JUNE 30,		DECEMBER 31,
	2002		2001

Long lived assets:
United States	$	252	$	356
Germany		839		718

	$	1,091	$	1,074

5. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 requires goodwill to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards required. The Company adopted SFAS 142 in the quarter ended March 31, 2002. The adoption of SFAS 142 did not have a material impact on our financial position or results of operations.

In August 2001, the FASB released SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which is effective in 2002. SFAS 144 establishes standards for accounting for impairment of long-lived assets used by an entity or held measuring impairments. The Company adopted SFAS 144 in the quarter ended March 31, 2002. The adoption of SFAS 144 did not have a material impact on our financial position or results of operations.

In November 2001, the FASB issued an announcement on the topic of “Income Statement characterization of Reimbursements Received for Out of Pocket Expense Incurred” (the “Announcement”), which was subsequently incorporated in Emerging Issues Task Force (“EITF”) No. 01-14. The Announcement requires companies to characterize reimbursements received for out of pocket expenses as revenues in the statement of operations. Historically, the Company has netted reimbursements received for out of pocket expenses against the related expenses in the accompanying condensed consolidated statements of operations. The Announcement is to be applied in financial reporting periods beginning after December 15, 2001 and comparative financial statements for the prior year are to be reclassified to comply with the guidance in the Announcement. The Company adopted the Announcement in the quarter ended March 31, 2002. The Announcement did not have a material effect on total consulting and training revenues or the consulting and training gross margin percentages and had no effect on net loss as it increased both consulting and training revenues and cost of consulting and training.

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt the provisions of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.

6. SUBSEQUENT EVENT

In July 2002, the Company announced a restructuring program in an effort to reduce the Company’s operating expenses. In connection with the restructuring, the Company reduced its worldwide headcount by approximately 34%. The actions resulted in severance related costs and a provision for losses on operating leases in the U.S. and Germany. Restructuring and related costs will approximate $680,000, of which approximately $376,000 will be for severance related costs and $304,000 will be for facility related costs associated with the termination of employees. The restructuring program reduced approximately 40 employees across all areas of the Company's worldwide workforce. The provision for facility costs relates primarily to the portion of the Company’s leased office space in the U.S. that it intends to sublease at prevailing market rates, which are less than the rates that the Company is obligated to pay under its contractual lease commitment.

The Company anticipates that it will pay the severance related costs by September 30, 2002. Payments on the facility related costs extend approximately through the termination of the Company's contractual lease commitment in April 2004.

PART I: FINANCIAL INFORMATION

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with Poet’s unaudited condensed consolidated financial statements and notes thereto. The results described below are not necessarily indicative of the results to be expected in any future period.

OVERVIEW

We are a provider of innovative software infrastructure and solutions that allow organizations to efficiently share, manage and manipulate complex data and facilitate effective business-to-business processes and information exchange over the Internet. Our Internet solutions provide our customers with the ability to efficiently create, manage, manipulate and electronically distribute and exchange complex business information such as product catalogs, customer pricing and other related information. Our solutions leverage the Internet as a new means to increase customer relationships, create new electronic sales channels, accelerate and automate business processes and reduce overhead costs. Our object database management system utilizes and supports complex, multidimensional data models, or frameworks within a database for the organization of information elements and their interrelationships, and standard Internet programming languages. Our database system allows our customers, software vendors and original equipment manufacturers, to build efficient, secure, reliable and high performance applications that are fully integrated, easy to use and cost efficient. Our open systems approach, which works with a variety of development tools, hardware, system software and networks, allows our customers to rapidly develop applications using our database products and customize our Internet solutions for work with a variety of standard application environments and third-party tools without having to make any significant adjustments to their existing internal information technology systems. It is our objective to make complex applications simple and affordable for a large group of organizations by providing sophisticated, easy to use and powerful software products that leverage the Internet and existing and emerging technology platforms.

From commencement of our operations in March 1995 through June 2002, our operating activities related primarily to increasing our research and development capabilities, designing and developing the software products which we are currently selling and staffing our administrative, sales and marketing organizations. Since inception, we have incurred significant losses, and as of June 30, 2002, we had an accumulated deficit of $49.2 million. For the three months ended June 30, 2002, our net loss was $2.8 million. We have not achieved profitability on a quarterly or annual basis and anticipate that we will incur net losses for the foreseeable future. We expect to continue to incur significant selling and marketing, product development, professional services and administrative expenses, and as a result, we will need to generate significantly higher revenues to achieve and maintain profitability. The Company employed 139 employees as of June 30, 2002 as compared to 172 employees as of June 30, 2001. Of the 139 employees employed as of June 30, 2002, 101 of them were employed in Europe and 38 in the United States.

RESULTS OF OPERATIONS

COMPARISON OF RESULTS FOR THE QUARTER ENDED JUNE 30, 2002 TO THE QUARTER ENDED JUNE 30, 2001

Total revenues decreased 30% from $2.8 million for the quarter ended June 30, 2001 to $2.0 million for the quarter ended June 30, 2002. Product revenues decreased 38% from $2.0 million for the quarter ended June 30, 2001 to $1.2 million for the quarter ended June 30, 2002. The decrease in product revenues was due primarily to weakening economic conditions in the United States and Europe. Consulting and training revenues decreased 25% from $352,000 for the quarter ended June 30, 2001 to $265,000 for the quarter ended June 30, 2002. The decrease in consulting and training revenues was due primarily to a decrease in consulting services performed in relation to our eSupplier Solutions product line in the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001. Support and maintenance revenues remained relatively unchanged at $0.5 million for the quarters ended June 30, 2001 and 2002.

Cost of product revenues increased 155% from $58,000 in the quarter ended June 30, 2001 to $148,000 in the quarter ended June 30, 2002. Cost of product revenues includes the cost of licensing third-party software incorporated into our products and the costs of packaging and distributing our products. The increase was attributable primarily to an increase in production costs related to our eSupplier Solutions product family, which reflects the amortization cost related to the purchase of software incorporated into our eSupplier Solutions product family and the write down of inventory due to inventory obsolescence. The gross margin for product decreased to 88% in the quarter ended June 30, 2002 from 97% in the quarter ended June 30, 2001 primarily as a result of the increase in production costs and the decrease in product sales. Cost of consulting and training revenues increased 17% from $319,000 in the quarter ended June 30, 2001 to $372,000 in the quarter ended June 30, 2002. This increase was attributable primarily to an increase in

personnel and related compensation. The gross margin (loss) for consulting and training decreased to -40% in the quarter ended June 30, 2002 from 9% in the quarter ended June 30, 2001, primarily as a result of lower utilization of consulting and training personnel and the decrease in consulting and training revenues. Cost of support and maintenance revenues increased 28% from $302,000 in the quarter ended June 30, 2001 to $386,000 in the quarter ended June 30, 2002. The increase was attributable primarily to an increase in personnel and related compensation. The gross margin for support and maintenance decreased to 19% in the quarter ended June 30, 2002 from 37% in the quarter ended June 30, 2001 primarily as a result of an increase in personnel and related compensation.

Selling and marketing expenses decreased 35% from $3.4 million in the quarter ended June 30, 2001 to $2.2 million in the quarter ended June 30, 2002. Selling and marketing expenses decreased primarily as a result of a decrease in spending on sales and marketing programs and a decrease in sales and marketing personnel and related expenses.

Research and development expenses increased 9% from $1.0 million in the quarter ended June 30, 2001 to $1.1 million in the quarter ended June 30, 2002. This increase was attributable primarily to an increase in research and development personnel and an increase in outsourced research and development.

General and administrative expenses decreased 13% from $820,000 in the quarter ended June 30, 2001 to $713,000 in the quarter ended June 30, 2002. The decrease was attributable primarily to a decrease in administrative personnel and a reduction in corporate development efforts.

Other income, net decreased 40% from income of $274,000 in the quarter ended June 30, 2001 to income of $164,000 in the quarter ended June 30, 2002. The decrease was attributable primarily to interest income earned on lower cash and equivalents and investment balances in the quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001, as well as the overall decrease in interest rates on investment balances.

COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 TO THE SIX MONTHS ENDED JUNE 30, 2001

Total revenues decreased 26% from $5.6 million for the six months ended June 30, 2001 to $4.1 million for the six months ended June 30, 2002. Product revenues decreased 30% from $3.8 million for the six months ended June 30, 2001 to $2.6 million for the six months ended June 30, 2002. The decrease in product revenues was due primarily to weakening economic conditions in the United States and Europe. Consulting and training revenues decreased 27% from $816,000 for the six months ended June 30, 2001 to $593,000 for the six months ended June 30, 2002. The decrease in consulting and training revenues was due primarily to a decrease in consulting services performed in relation to our eSupplier Solutions and FastObjects product lines in the six months ended June 30, 2002 compared to the six months ended June 30, 2001. Support and maintenance revenues decreased 7% from $974,000 for the six months ended June 30, 2001 to $907,000 for the six months ended June 30, 2002. The decrease in support and maintenance revenues was due primarily to an overall decrease in support and maintenance customers.

Cost of product revenues increased 94% from $124,000 in the six months ended June 30, 2001 to $240,000 in the six months ended June 30, 2002. This increase was attributable primarily to an increase in production costs related to our eSupplier Solutions product family. The gross margin for product decreased to 91% in the six months ended June 30, 2002 from 97% in the six months ended June 30, 2001 primarily as a result of the increase in production costs in relation to our eSupplier Solutions product line and the decrease in product sales. Cost of consulting and training revenues increased 17% from $579,000 in the six months ended June 30, 2001 to $679,000 in the six months ended June 30, 2002. This increase was attributable primarily to an increase in personnel and related compensation. The gross margin (loss) for consulting and training decreased to -15% in the six months ended June 30, 2002 from 29% in the six months ended June 30, 2001, primarily as a result of lower utilization of consulting and training personnel and the decrease in revenues. Cost of support and maintenance revenues increased 21% from $621,000 in the six months ended June 30, 2001 to $750,000 in the six months ended June 30, 2002. The increase was attributable primarily to an increase in personnel and related compensation. The gross margin for support and maintenance decreased to 17% in the six months ended June 30, 2002 from 36% in the six months ended June 30, 2001 primarily as a result of an increase in personnel and related compensation.

Selling and marketing expenses decreased 40% from $7.4 million in the six months ended June 30, 2001 to $4.5 million in the six months ended June 30, 2002. Selling and marketing expenses decreased primarily as a result of a decrease in spending on sales and marketing programs and a decrease in sales and marketing personnel and related expenses.

Research and development expenses decreased 6% from $2.2 million in the six months ended June 30, 2001 to $2.0 million in the six months ended June 30, 2002. This decrease was attributable primarily to a decrease in research and development personnel and a reduction in outsourced research and development.

General and administrative expenses decreased 18% from $1.7 million in the six months ended June 30, 2001 to $1.4 million in the quarter ended June 30, 2002. The decrease was attributable primarily to a decrease in administrative personnel and a reduction in corporate development efforts.

Other income, net decreased 59% from income of $740,000 in the six months ended June 30, 2001 to income of $300,000 in the six months ended June 30, 2002. The decrease was attributable primarily to interest income earned on lower cash and equivalents and investment balances in the six months ended June 30, 2002 as compared to the six months ended June 30, 2001, as well as the overall decrease in interest rates on investment balances.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have primarily financed our operations through private sales of redeemable convertible preferred stock and from our initial public offering, resulting in net proceeds of $16.4 million and $41.5 million, respectively. To a lesser extent, we have also financed our operations through a convertible note financing and lending arrangements in the aggregate amount of $6.3 million.

As of June 30, 2002, we had $7.9 million in cash and equivalents, $9.3 million in short-term investments and $15.9 million in working capital. As of December 31, 2001, we had $10.9 million in cash and equivalents, $10.9 million in short-term investments and $21.2 million in working capital. The decrease in working capital was primarily due to net cash used in operating activities.

Net cash used in operating activities was $4.3 million for the six months ended June 30, 2002 and $5.8 million for the six months ended June 30, 2001. Net cash used in operating activities for the six months ended June 30, 2002 primarily reflects the net loss partially offset by depreciation and amortization and the decrease in accounts receivable. Net cash used in operating activities for the six months ended June 30, 2001 primarily reflects the net loss and the decrease in accounts payable and accrued liabilities partially offset by the decrease in accounts receivable. As noted in Footnote 6 in the Notes to Condensed Consolidated Financial Statements, the Company recently announced its restructuring program. The Company expects to use approximately $440,000 in operating activities for the quarter ended September 30, 2002 for payments under the Company's restructuring plan.

Net cash provided by investing activities was $1.3 million for the six months ended June 30, 2002 and $6.2 million for the six months ended June 30, 2001. Cash from investing activities reflects proceeds from the sale and maturity of short-term and long-term investments, as well as purchases of short-term and long-term investments and purchases of property, furniture and equipment in each period. Since inception, we have generally funded capital expenditures either through the use of working capital or, to a lesser extent, through equipment leases.

Net cash used in financing activities was $53,000 for the six months ended June 30, 2002 and $23,000 for the six months ended June 30, 2001. Our financing activities for the six month periods ended June 30, 2002 and 2001 used cash primarily to repay debt in the form of loans and capital leases and provided cash primarily through the issuance of common stock.

In 1997, our subsidiary, Poet Software GmbH, entered into a loan agreement with IKB Deutsche Industriebank in the amount of DM 1.5 million (approximately $684,000 based on the U.S. Dollar/Deutsche Mark exchange rate at December 31, 2001) bearing interest at 7% per year with principal payments due quarterly of DM 125,000 commencing on September 15, 1999 and ending on March 15, 2002. The Company repaid the loan in full in March 2002.

We expect to incur significant operating expenses, particularly selling and marketing and research and development expenses, for the foreseeable future in order to execute our business plan. We anticipate that such operating expenses will constitute a material use of our cash resources. As a result, our net cash flows will depend heavily on the level of future sales and our ability to manage operating expenses. In addition, we may utilize cash resources to fund acquisitions of, or investments in, complementary businesses, technologies or product lines. Although it is management’s opinion that our cash resources together with our anticipated cash flows from operations will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next 12 months, changes in our customer demand or impairment of our investments may cause unanticipated fluctuations in our cash resources.

CRITICAL ACCOUNTING POLICIES

We have identified the following as critical accounting policies to our company: revenue recognition and reserves for doubtful accounts.

Revenue Recognition

Our revenue recognition policy is significant because our revenue is a key component of our results of operations. In addition, our revenue recognition determines the timing of certain expenses, such as commissions and royalties. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter.

Reserves for Doubtful Accounts

We record a provision for doubtful accounts for all specific receivables that we judge to be unlikely for collection. We also record an additional provision for doubtful accounts based on size and age of all receivable balances against which we have not established a specific reserve. We periodically review these allowances, analyzing each customer’s payment history and information regarding customer’s credit worthiness known to us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to fluctuations in interest rates and in foreign currency exchange rates:

Interest Rate Exposure. Our exposure to market risk due to fluctuations in interest rates relates primarily to cash and equivalents, short-term investments and long-term investments, which consists primarily of investments in commercial paper, money market accounts and federal government agencies, and reported at an aggregate fair market value of $17.1 million as of June 30, 2002. These securities are subject to interest rate risk in as much as their fair value will fall if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from the levels prevailing at June 30, 2002, for example, the fair value of the portfolio would not decline by a material amount. We do not use derivative financial instruments to mitigate the risks inherent in these securities. However, we do attempt to reduce such risks by generally limiting the maturity date of such securities to no more than three months, placing investments with high credit quality issuers and limiting the amount of credit exposure with any one issuer. In addition, we believe that we currently have the ability to hold these investments until maturity and, therefore, believe that reductions in the value of such securities attributable to short-term fluctuations in interest rates would not materially affect our financial position, results of operations or cash flows.

Foreign Currency Exchange Rate Exposure. Our exposure to market risk due to fluctuations in foreign currency exchange rates relates primarily to the inter-company balance with our German subsidiary. Although we transact business in various foreign countries, settlement amounts are usually based on U.S. dollars or the euro. Transaction gains or losses have not been significant in the past, and we have not entered into any hedging activity on the euro or other currencies. Based on the inter-company balance of approximately $2.3 million at June 30, 2002, a hypothetical 10% adverse change in the euro against U.S. dollar would not result in a material foreign exchange loss. Consequently, we do not expect that reductions in the value of such inter-company balances, third-party loan receivable balances or of other account balances denominated in foreign currencies resulting from even a sudden or significant fluctuation in foreign exchange rates would have a direct material impact on our financial position, results of operations or cash flows.

Notwithstanding the foregoing, analysis of the direct effects of interest rate and foreign currency exchange rate fluctuations on the value of our investments and accounts and the indirect effects of such fluctuations could have a material adverse effect on our business, financial condition and results of operations. For example, international demand for our products is affected by foreign currency exchange rates. In addition, interest rate fluctuations may affect the buying patterns of our customers. Furthermore, interest rate and currency exchange rate fluctuations have broad influence on the general condition of the U.S., foreign and global economies that could have a material adverse effect on us.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On June 11, 2002, the Company held its Annual Meeting of Stockholders. At the meeting, the stockholders elected as directors Dirk Bartels (with 4,905,734 affirmative votes, and 0 votes withheld), Gert Koehler (with 4,905,734 affirmative votes, and 0 votes withheld), Herbert May (with 4,905,734 affirmative votes, and 0 votes withheld) and Gerhard Schulmeyer (with 4,905,734 affirmative votes, and 0 votes withheld) to serve on the Company’s Board of Directors for one-year terms or until their successors are duly elected.

The stockholders also ratified the appointment of Deloitte and Touche LLP as the Company’s independent public accountants for the current fiscal year (with 4,905,734 affirmative votes, 0 votes against, 0 votes abstaining and 0 votes withheld).

ITEM 5. OTHER INFORMATION

ADDITIONAL INFORMATION ACCORDING TO RULES AND REGULATIONS NEUER MARKT

The following is a summary of changes in stockholders’ equity for the six months ended June 30, 2002 (in thousands, except share amounts).


													Accumulated
	Common Stock						Deferred						Other		Total
					Paid in		Stock			Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital		Compensation			Deficit			Income (Loss)		Equity

Balances at December 31, 2001		10,876,912	$	11	$	66,331	$	(126	)	$	(43,954	)	$	283	$	22,545
Issuance of common stock		11,734		—		10		—			—			—		10
Amortization and reversals of deferred stock compensation		—		—		—		51			—			—		51
Net loss		—		—		—		—			(5,220	)		—		(5,220	)
Other comprehensive loss		—		—		—		—			—			172		172

Balances at June 30, 2002		10,888,646	$	11	$	66,341	$	(75	)	$	(49,174	)	$	455	$	17,558

The following is a summary of changes in stockholders’ equity for the six months ended June 30, 2001 (in thousands, except share amounts).


													Accumulated
	Common Stock						Deferred						Other			Total
					Paid in		Stock			Accumulated			Comprehensive			Stockholders'
	Shares		Amount		Capital		Compensation			Deficit			Income (Loss)			Equity

Balances at December 31, 2000		10,818,867	$	11	$	66,217	$	(353	)	$	(31,894	)	$	400		$	34,381
Issuance of common stock		40,968		—		87		—			—			—			87
Amortization and reversals of deferred stock compensation		—		—		—		114			—			—			114
Net loss		—		—		—		—			(6,470	)		—			(6,470	)
Other comprehensive loss		—		—		—		—			—			(288	)		(288	)

Balances at June 30, 2001		10,859,835	$	11	$	66,304	$	(239	)	$	(38,364	)	$	112		$	27,824

Ownership of Common Stock and Options By Officers and Directors of Poet Holdings, Inc.

The following table sets forth information with respect to beneficial ownership of the Company’s common stock and options by each officer and director as of June 30, 2002.


			Shares of Stock
	Shares of Common Stock		Options Outstanding at
Name	Owned at June 30, 2002		June 30, 2002

Dirk Bartels		781,836		50,000
Gert Koehler(1)		555,436		45,000
Herbert May(1)		—		40,000
Gerhard Schulmeyer(1)		—		50,000
Jochen Witte		405,717		52,500	(2)
Jerry Wong		29,323		93,500

(1)		Outside, non-executive directors




(2)		Includes an option to purchase 2,500 held by Mrs. Witte

At June 30, 2002, shares of stock options outstanding to non-officer employees totaled 1,329,572 shares.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

99.1 Certification of Chief Executive Officer and Chief Financial Officer

b) Reports on Form 8-K

POET HOLDINGS, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 13, 2002.


		Poet Holdings, Inc. (Registrant)

		By:		/s/ DIRK BARTELS Dirk Bartels President, Chief Executive Officer and Director

		By:		/s/ JERRY WONG Jerry Wong Executive Vice President of U.S. Operations, Principal Accounting Officer and Vice President of Finance

EXHIBIT INDEX


99.1		Certification of Chief Executive Officer and Chief Financial Officer

Current report on Form 8-K filed on April 30, 2002 with respect to the announcement of the financial results for the quarter ended March 31, 2002.

Current report on Form 8-K filed on July 25, 2002 with respect to the announcement of the financial results for the quarter ended June 30, 2002 and a corporate restructuring.