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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT 1934
FROM THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 000-25857
PERSISTENCE SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3138935
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 372-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
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 than 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 [ ]
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $17.2 million as of February 28, 2002 based upon
the closing sale price on the Nasdaq National Market reported for such date of
$1.09 per share. Shares of Common Stock held by each officer and director and by
each person who owns 10% of more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
There were 20,095,160 shares of the registrant's Common Stock issued and
outstanding as of February 28, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the 2002 Annual Meeting of Stockholders to be held on June 6,
2002.
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We own or have rights to trademarks or trade names that we use in
conjunction with the sale of our products and services. "Persistence," as well
as the logo for "Live Object Cache," are registered trademarks owned by us. We
have registrations pending for the use of our logo with "Persistence," as well
as "PowerTier," "Dynamai," "EdgeXtend" and "The Engine for E-Commerce" are also
trademarks of ours. This annual report on Form 10-K also makes reference to
trademarks and trade names of other companies that belong to them.
PART I
ITEM 1. BUSINESS.
COMPANY OVERVIEW
Persistence Software solves data access problems for distributed and
real-time systems. Persistence solutions help deliver better business visibility
for applications which require current information about customers, products and
suppliers.
Persistence provides a suite of data management products that sit between
existing databases - such as Oracle and DB/2 - and application servers - such as
WebLogic and WebSphere. Developers can configure these products to structure and
position business information with optimal efficiency, improving application
server performance and simplifying application distribution while reducing
database costs. By effectively managing enterprise data, users achieve the
benefit of "business visibility" - the ability to manage their business in real
time with data and applications where they need them, when they need them. By
caching data, or moving information stored in back-end computer systems closer
to users, our software dramatically reduces network traffic and data latency,
resulting in both better application performance and faster transaction
processing. POWERTIER application servers support both C++ and Sun Microsystems'
full Java 2 Platform, Enterprise Edition (J2EE, formerly known as Enterprise
Java Beans or EJB) standards to enable businesses to deploy sophisticated C++ or
Java applications, which readily scale, and accommodate rapidly increasing
numbers of users. Our EDGEXTEND data management infrastructure for J2EE
application servers offers a data architecture for IBM's WebSphere and BEA's
WebLogic application servers to support highly distributed and
transaction-oriented applications both within data centers and in remote
locations. Our DYNAMAI Web content accelerator improves the speed and
scalability of electronic commerce Web sites that rely heavily on dynamically
generated content using technologies such as Java Server Pages and Active Server
Pages. Our major customers include AT&T, Cablevision, Cisco, FedEx, Instinet,
Intershop, Lucent, Motorola, Nokia and Salomon Smith Barney.
INDUSTRY BACKGROUND
Today's IT managers are faced with many challenges as they attempt to scale
their existing infrastructure to meet the ever increasing demands of their
users. They are asked to support more users with better response times, but
without a commensurate increase in resources, both people and money, to meet
these challenges. The solutions of past years - replicated data centers - are no
longer an option for most IT professionals. Consequently, they are looking for
alternative technology strategies to meet the performance demands of their
corporate enterprise systems and reduce the associated operating costs.
As systems scale to meet growing demands, companies are finding that many of
their systems are reaching their technological limitations. While network
bandwidth can be a problem, more frequently the absence of real-time data being
available to distributed users on the network is the real limitation on
application performance resulting in:
o SLOW RESPONSE TIMES: Many enterprise applications were not designed to
scale to handle large numbers of concurrent users. Users accessing these
systems often experience lengthy delays as the number of concurrent
users increases.
o SYSTEM FAILURES: Disaster recovery and fail-over capability are crucial
for systems required to operate 24 hours a day, 7 days a week. Users
accessing these systems at peak volume can experience frequent system
crashes.
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o LIMITED SCALABILITY: As applications are deployed to more and more
remote users in a system, improving the productivity of those users, the
need for a system to scale easily without the need and expense of
additional data centers is essential.
In large part, the problems facing enterprises today are derived from the
continuing evolution and increasing sophistication of enterprise applications.
Simple applications supporting back office systems typically had few users
accessing limited amounts of data. As decision-making based on real-time,
frequently changing data was moved farther out to the edge of the enterprise,
the need for vital information to support these business-critical applications
became paramount. In addition, the need to keep the cost of these systems to a
minimum provided an additional challenge to the system architects. Traditional
system architectures and approaches cannot completely solve the problem. A new
distributed data infrastructure is required.
The next generation of enterprise applications will require a fundamentally
new data management infrastructure, which will allow application servers to
scale, meeting the demands of an ever increasing user base, and to be deployed
without the need for an expensive back end IT infrastructure. These platforms
must provide:
o REAL-TIME SCALABILITY: accommodate up to thousands of end users with
consistent sub-second response times;
o HIGH AVAILABILITY: handle system failures without interruption and
without losing critical information for potentially thousands of
concurrent users;
o RAPID ADAPTABILITY: allow companies to continuously improve their
business processing through automated development and management of
differentiated business-critical applications; and
o EDGE COMPUTING: enable businesses to extend their processing across
organizational boundaries, support employees, remote users and even
partners and customers.
PERSISTENCE SOLUTION
Our POWERTIER, EDGEXTEND and DYNAMAI family of products provide a data
management infrastructure that is specifically designed to enable high volume,
high performance, distributed applications. Our products, POWERTIER for J2EE,
POWERTIER for C++, EDGEXTEND for J2EE and DYNAMAI, address the scalability,
availability and adaptability demands that typically occur when delivering
business solutions for high demand, globally distributed enterprise business
applications. Our products offer the following key benefits:
REAL-TIME RESPONSE FOR THOUSANDS OF CONCURRENT USERS. Our POWERTIER,
EDGEXTEND and DYNAMAI products were designed specifically to accommodate high
volume transaction processing and the data integrity requirements of distributed
applications. POWERTIER, EDGEXTEND and DYNAMAI utilize caching technology.
Caching is a process in which select data is pulled out of back-end systems and
into the server cache, which allows the data to be shared and manipulated by
multiple users. Replication between POWERTIER AND EDGEXTEND server caches using
the POWERSYNC feature allows a cluster of application servers to provide highly
scalable performance as the number of users increases. DYNAMAI is designed to
use a similar clustering scheme to enable successful cooperation among multiple
caches. This architecture helps reduce the work load on back-end systems and
accelerates application performance. The effect of this architecture is to
minimize unnecessary network traffic and thereby enable high performance and
reliability even with significant transaction volumes. We believe that our
POWERTIER, EDGEXTEND, and DYNAMAI products offer superior performance and
scalability to support the deployment of large-scale distributed enterprise
applications.
DRAMATIC REDUCTIONS IN TIME-TO-MARKET FOR ENTERPRISE APPLICATIONS. Our
POWERTIER AND EDGEXTEND products decrease time-to-market and development cycles
for sophisticated applications due to our proprietary and patented
object-to-relational mapping technology. This technology enables the automatic
generation of software code, which minimizes basic, low-level programming tasks,
such as security and database access. Both POWERTIER AND EDGEXTEND accelerate
development by giving developers access to data in a familiar way, as software
components, and provides application developers with a framework to rapidly
build electronic commerce applications. Similarly, the DYNAMAI product enhances
the performance and scalability of Web-based systems through a
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relatively simple cache configuration process, which does not require costly
re-architecture of existing back-end systems.
PROTECTS AND LEVERAGES EXISTING INFORMATION TECHNOLOGY INVESTMENTS.
POWERTIER and EDGEXTEND enable developers to build new enterprise applications
while simultaneously integrating existing back-end systems. POWERTIER AND
EDGEXTEND'S flexible architecture integrates with disparate database servers,
web servers and multiple clients, while supporting multiple programming
languages and computing platforms. POWERTIER and EDGEXTEND provide enhanced
flexibility and inter-operability to link existing enterprise applications and
systems, allowing businesses to leverage their investments in information
technology and extend them to the edge of their enterprise and beyond.
Similarly, the DYNAMAI product is designed to provide its benefits with minimal
disruption of existing information technology investments.
LEADERSHIP IN EMERGING STANDARDS. Customers are increasingly seeking open,
standards-based technology solutions that enable them to develop and implement
new applications rapidly. Both POWERTIER and EDGEXTEND provide for application
server solutions that support the J2EE specification to enable businesses to
deploy high performance, scalable Java applications for the enterprise. We
worked with the Sun Microsystems consortium to define an industry-wide component
standard to be used when building enterprise applications with the Java
language. It is this standard upon which our POWERTIER and EDGEXTEND products
are built, and we believe that this emerging platform has the potential to
dramatically simplify the development of distributed, multi-tier enterprise
applications. Sun Microsystems introduced the Java 2 Platform, Enterprise
Edition (J2EE) in 1999, which is a suite of enterprise Java technology
specifications. Persistence became one of Sun's first J2EE licensees, and we
intend to continue to be a leading adopter and contributor to these technologies
as they evolve.
OPTIMIZED DISTRIBUTED DATA MANAGEMENT ARCHITECTURE. All our products are
built on the core Persistence technologies of O/R Mapping, Dynamic Caching and
Cache Synchronization. This expertise, called Distributed Dynamic Caching (DDC),
allows for a distributed data management architecture which is highly scalable,
suitable for high volume transaction oriented applications, and capable of
supporting thousands of concurrent users. In addition, this architecture is
designed to be implemented in a globally distributed enterprise environment
without the need for an expensive back-end infrastructure. It provides for data
center type performance without the need for replicated data centers.
PERSISTENCE STRATEGY
Our goal is to fundamentally restructure how companies extend and leverage
their vital business information by enabling a distributed data management
infrastructure. To achieve this goal, we intend to:
INCREASE PARTNERSHIPS WITH INDEPENDENT SOFTWARE VENDORS (ISVS). We intend to
continue to develop and expand relationships with ISVs, in particular IBM
WebSphere and BEA WebLogic. Through our EDGEXTEND product for WebSphere and
EDGEXTEND for WebLogic we now offer a complementary J2EE product, which
leverages the unique data management capability of Persistence's technologies.
As part of the IBM and BEA partner programs, we believe that these relationships
will provide additional marketing and sales channels for our products and
facilitate the successful deployment of customer applications.
CONTINUE TO EXPAND OUR GROWING OEM BUSINESS. We intend to become a market
leader in providing data management infrastructure software to enable
sophisticated enterprise applications. We have worked with several customers who
have successfully built their global enterprise applications on core Persistence
technologies and are deploying these applications to their customers. We will
continue to collaborate with our innovative and advanced customers to develop
and deliver product features that address their needs. We believe that this
collaboration focuses our overall product development effort and speeds our
time-to-market.
EXTEND TECHNOLOGY LEADERSHIP POSITION IN STANDARDS-BASED PLATFORMS FOR NEXT
GENERATION ENTERPRISE APPLICATIONS. We intend to extend our technology
leadership in distributed data management for the transactional application
server and dynamic Web content acceleration markets by enhancing our underlying
technology to offer real-time scalability, high availability and rapid
adaptability for the next generation of enterprise business applications. To
achieve this objective, we will continue to make investments in our research and
development organization. In addition, we intend to be a leader in the
definition and adoption of emerging technology standards, such as J2EE, which we
believe have the potential to dramatically simplify the development of
distributed, multi-tier applications. We have been a pioneer in the areas of
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caching and object-relational mapping, and hold several patents on core
technologies. We intend to continue to innovate and create new enabling
technologies for distributed data management.
EXPAND PRODUCT PLATFORM TO OFFER COMPLEMENTARY SOLUTIONS. In addition to
extending our technology leadership, we intend to broaden and enhance our
product platform to incorporate complementary solutions for developing and
deploying sophisticated enterprise applications. We will continue to make
investments in our research and development organization for many of these
product initiatives. We will also consider, from time to time, bolstering these
internal efforts with strategic acquisitions, and partnerships with software
vendors who have complementary product offerings. The addition of these
complementary technologies will enable us to offer a more complete platform for
our customers.
LEVERAGE INSTALLED CUSTOMER BASE. We believe there are significant
opportunities to expand the use of our products throughout our current customer
base. This is particularly true for customers who have adopted our technology
for a particular part of their business, but who have standardized on IBM's
WebSphere or BEA's WebLogic for their mainstream applications. We now have the
opportunity to re-engage with those customers on a broader basis as they deploy
their applications throughout their enterprise. Through Persistence's
distributed data management architecture we can enable our customers to scale
and deploy applications without the need for replicated data centers in some
cases saving them millions of dollars.
MAINTAIN OUR INTERNATIONAL PRESENCE. We believe there are significant
international opportunities for our products and services, in particular, in
Europe and Asia. Currently, we have established direct sales operations in the
United Kingdom, Germany, and Hong Kong. In addition to our direct sales
operations, we also distribute our products throughout Europe and Asia with
distributors and systems integrators. We intend to extend these international
third-party distributor and systems integrator relationships.
PRODUCTS
Our POWERTIER platform is a family of transactional application server
products that deliver scalability, high availability and rapid adaptability for
high volume, high performance, distributed enterprise applications. Our current
product line consists of POWERTIER for J2EE and POWERTIER for C++. The following
table describes the major features and benefits of our POWERTIER platform.
PRODUCT FEATURES BENEFITS
- ------- -------- --------
POWERTIER FOR J2EE Shared transactional object cache Enables real-time scalability by reducing
database traffic
Application server cache synchronization Allows cooperative processing across
organizational boundaries
Application server failover Delivers high availability by replicating
information across clusters of application
server caches
Integrated end-to-end systems, including: Delivers out of box productivity and an
end-to-end development and deployment platform
o XML server
o EJB server
J2EE 1.2 - compliant security encription Simplifies developer inclusion of encryption
Certified for the J2EE 1.2 standard Protects customers' IT investments as a result
of open solution
POWERTIER FOR C++ Shared transactional object cache Enables real-time scalability by reducing
database traffic
Application server cache synchronization Allows cooperative processing across
organizational boundaries
Application server failover Delivers high availability by replicating
information across clusters of application
server caches
Support for CORBA standard Protects customers' IT investments as a result
of open solution
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POWERTIER for J2EE
Our POWERTIER for J2EE application server platform incorporates our patented
technologies into a J2EE-based transactional application server. The J2EE
standard, as defined by the Java Software division of Sun Microsystems, is
gaining rapid acceptance as a programming language for complex enterprise
applications. J2EE provides a consistent way to program and integrate services
for companies building distributed business-to-business applications with the
Java programming language.
The J2EE standard specifies container-managed persistent objects, which
automate the mapping between EJB components and relational database tables. This
feature allows programmers to build complex applications quickly by making
relational data look like software components, which can be easily manipulated.
We worked with the Sun Microsystems consortium to help define the initial EJB
standard, and we continue to contribute to new versions of the J2EE standard.
Our POWERTIER for J2EE platform now runs on the Windows NT and multiple
varieties of the Unix operating systems.
Our latest version of POWERTIER for J2EE, POWERTIER 7 with POWERPAGE, is
designed to simplify the complex task of developing high performance, scalable
web applications and eliminate the need to compromise between powerful
application servers and simplicity of web page creation. The POWERTIER 7
application server is designed to have an end-to-end J2EE development platform
that enhances development team productivity and allows scalable, flexible
applications to be rolled out at internet speed.
POWERTIER 7 also:
o Is designed to be security compliant with Sun Microsystems' J2EE 1.2
specification, providing integrated and comprehensive authorization,
authentication and encryption capability for new applications
o Includes an enterprise class Servlet Engine tightly integrated with
POWERTIER 7, with support for Java servlets and JSPs. The Servlet Engine
is designed to be scalable and fault tolerant.
POWERTIER for C++
Our POWERTIER for C++ product is a high-performance transactional
application server, which is based on our patented technologies and the Common
Object Request Broker Architecture, or CORBA, standard for communication between
distributed applications. The CORBA standard is managed by an industry group
called the Object Management Group, of which we are a contributing member. We
are also one of the authors, along with Oracle, IBM and others, of an emerging
component of the overall CORBA standard, called the Persistent State Service
specification. Our POWERTIER for C++ platform runs on the Windows NT and Unix
operating systems. We have licensed the J2EE platform and are a contributor to
the Java standard. Other features and benefits include:
o PATENTED TECHNOLOGY PLATFORM. Our application server cache software
architecture and cache replication technology have been designed to
serve as the foundation for a variety of scalable electronic commerce
applications.
o SHARED CACHING. Our cache technology is the foundation for the high
performance characteristics of our transactional application server. To
maximize performance, dynamic information such as product inventory data
is retrieved from a database into the application server cache. This
in-memory information may be accessed simultaneously by multiple users,
saving each user from having to access a disk-based database for that
information. This feature reduces network traffic between the
application server and the database, which we believe results in higher
performance.
o TRANSACTIONAL CACHING. To enable users to get a consistent view of
information within the shared cache, our technology prevents one user
from seeing uncommitted changes made by another user. The ability of our
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shared application server cache to isolate users from dynamic changes to
component information, such as inventory data, differentiates our
application server cache from other caching technologies, which can only
manage static information, such as web pages. This feature allows high
performance caching of dynamic or transactional information.
o CACHE REPLICATION. Our cache replication technology provides the
foundation for the scalability, stateful availability and fault
tolerance of our transactional application server. We define stateful
availability as a system that can transfer a user in the middle of a
complex business operation, such as a portfolio valuation, from one
application server to another without interruption or losing business
state, such as the user's portfolio information. To provide stateful
scalability, information from one application server cache can be
synchronized with information in one or more other application server
caches. Companies can deploy additional replicated application server
caches to increase their ability to support more users, allowing them to
use several smaller computers to do the work of one larger and more
expensive computer. Users' requests are automatically routed to the
application server with the most free capacity, enabling high
performance, notwithstanding increases in user volumes. In the event of
an application server failure, that application server's
responsibilities are automatically reassigned to another application
server, improving system availability.
o CLUSTER MANAGEMENT. We have developed complementary, proprietary
administration software, which enables remote administration for
clusters of application servers, reducing both administrative costs and
the possibility of error. This management software also enables
centralized monitoring, via a standard Web browser, of the cluster
through any individual application server. This feature contributes to
greater system availability and reduced administrative costs.
o DEVELOPMENT AUTOMATION. Our POWERTIER development environment includes
frameworks to automate or eliminate many development tasks. The
proprietary and patented object-relational mapping feature,
ObjectBuilder, automatically generates the software code to translate
software components into relational databases. This feature reduces the
programming time required to build enterprise applications. The
POWERTIER application server includes pre-built software services for
data management, transaction management and communications, relieving
the developer from having to build these services from scratch.
o STANDARDS-BASED. The POWERTIER application server platform uses an open
architecture that is based on industry standards such as Java, C++,
CORBA, Windows NT, UNIX, SQL, J2EE, EJB and others.
DYNAMAI
Our DYNAMAI Web content accelerator improves the speed and scalability of
electronic commerce Web sites that rely heavily on dynamically generated content
using technologies such as Java Server Pages and Active Server Pages. The
DYNAMAI product was released in 2000. The following table describes the major
features and benefits of DYNAMAI.
PRODUCT FEATURES BENEFITS
- ------- -------- --------
Dynamai Dynamic Web object cache Enables real-time scalability by reducing
application server and database workload
Event-based content invalidation Supports maintenance of "fresh" information in
cache
Automatic cache clustering Delivers high availability by replicating
information across clusters of application server
caches
On-the-fly content adaption Allows caching of personalized content
EDGEXTEND
Our EDGEXTEND for WebSphere and EDGEXTEND for WebLogic products are designed
to make the performance and reliability of Persistence's patented DDC technology
available to applications running on IBM's WebSphere and BEA's WebLogic
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application servers. EDGEXTEND provides a new distributed data management
architecture, which complements J2EE compliant application servers. Through the
J2EE Connector Architecture the data access layer is replaced by EDGEXTEND,
allowing the application servers to have the benefits of DDC without changing
their existing business and presentation logic. In addition, with this
distributed data architecture, WebSphere and WebLogic application servers can
operate outside of a data center in a "virtual data center" without the
requirement of an expensive relational database infrastructure. Our EDGEXTEND
for WebSphere product is scheduled to be released on a generally available basis
by the end of March 2002. Our EDGEXTEND FOR WebLogic product is scheduled to be
released on a generally available basis by the end of June 2002.
The following table describes the major features and benefits of EDGEXTEND:
PRODUCT FEATURES BENEFITS
- ------- -------- --------
EDGEXTEND for Shared transactional object Enables real-time scalability by reducing
IBM WebSphere(R) cache database traffic
Object-relational mapping that Speeds application development by managing
provides abstraction to database details for developer
database representation
Optimized usage of native Improves application capacity by efficiently
database libraries using database resources
Application server cache Improves application capacity by caching
EDGEXTEND for synchronization unpredictably changing data
BEA WebLogic(R)
Application server failover Delivers high availability by replicating
information across clusters of application
server cache
Shared transactional object Enables real-time scalability by reducing
cache database traffic
Object-relational mapping that Speeds application development by managing
provides abstraction to database details for developer
database representation
Optimized usage of native Improves application capacity by efficiently
database libraries using database resources
Application server cache Improves application capacity by caching
synchronization unpredictably changing data
Application server failover Delivers high availability by replicating
information across clusters of application
server caches
We believe that research and product development will be a key to our
success as a leader in providing distributed data management software in the
application server and dynamic Web content acceleration markets. Our research
and development expenditures totaled $5.6 million for 2001, $8.1 million for
2000 and $6.4 million for 1999.
CUSTOMERS
Our software products are licensed to customers worldwide for use in a wide
range of enterprise and electronic commerce applications, including real-time
electronic trading, supply chain management, network management, application
outsourcing and logistics management. Our services consist of professional
consulting services, technical support and training. The following table lists a
selection of customers who have purchased a significant amount of our products
or services in 2001 or 2000 (defined as purchases of approximately 1% or more of
our total revenues in either year.)
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E-COMMERCE/INTERNET FINANCIAL SERVICES/EXCHANGES
Cisco Systems Chase JP Morgan/Accordia
i2/Rightworks CNP Assurances
Intershop Credit Suisse First Boston
Network Appliance Instinet
Nexus Limited Corp Kinetech Services
Salomon Smith Barney
COMMUNICATIONS Zurich Arippina Gruppe
4T Solutions
AT&T
CSC Holdings (Cablevision) TRANSPORTATION & LOGISTICS
Lucent Technologies Effix
Motorola Hekimian Laboratories
Nokia Sabre Group Holdings (American Airlines)
Sprint WorldRes.com
MANUFACTURING & DISTRIBUTION OTHER
Hewlett Packard Applied Biosystems
Nippon Steel Bundesanstalt fur Arbeit
Convergys Information
Infron Technologies
Refco Group
In 2001, sales of products and services to Salomon Smith Barney accounted
for 15% of our total revenues and sales to Cablevision accounted for 11% of our
total revenues. In 2000, sales of products and services to Salomon Smith Barney
accounted for 16% of our total revenues. In 1999, sales of products and services
to Cisco accounted for 13% of our total revenues.
The following case studies illustrate how selected customers have used our
products to address their electronic commerce and core business application
needs. These case studies are based on information supplied by these customers,
however, we believe the information is accurate in all material respects.
Reuters, the parent of Instinet, and Cisco are both stockholders in our company.
REAL-TIME ELECTRONIC TRADING NETWORK
INSTINET CORPORATION. Instinet is the world's largest electronic agency
broker in equity securities. Historically, trading in fixed income securities
occurred almost exclusively over the telephone. Instinet revolutionized this
telephone-based fixed income trading with a global electronic broker trading
service for fixed income dealers that can accommodate up to 1,000 transactions
per second. It has designed a system based on the use of hundreds of replicated
POWERTIER application servers, operating in concert, to meet the performance and
scalability requirements of its electronic fixed income broker service.
INTRANET SUPPLY CHAIN MANAGEMENT
FEDERAL EXPRESS CORPORATION. The world's largest express transportation
company, FedEx transports more than three million items to over 200 countries
each business day, using a fleet of more than 620 aircraft and 44,000 vehicles.
In its effort to improve on-time deliveries, FedEx has built a global operations
center to monitor and control the movement of shipments worldwide. The global
operations center functions as the nerve center of the FedEx transportation
system, handling daily occurrences including changing flight schedules,
emergency maintenance, inclement weather and excess package volumes. Because the
company's existing mainframe systems lacked the required flexibility and
performance, FedEx turned to us for help in building a high performance intranet
system. By managing complex flight schedule information from multiple data
sources within a POWERTIER application server cache, the global operations
center can provide real-time contingency plans, enabling FedEx to provide
consistently high on-time package delivery rates and superior customer service.
FedEx estimates that, using the POWERTIER development environment, it has been
able to significantly reduce development time for new system functionality
compared to development in its traditional mainframe environment.
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INTERNET SERVICE PROVIDER NETWORK MANAGEMENT
CISCO SYSTEMS, INC. A worldwide leader in networking for the Internet, Cisco
Systems is committed to delivering hardware and software solutions that enable
service providers to meet the rapid growth of the Internet. The Cisco Service
Management System, or CSM, gives Service Providers sophisticated tools to
automate time-consuming network management tasks. For this system, Cisco
required a highly scalable, standards-based application server platform for
deploying network management applications for managed business services such as
virtual private networks, Internet telephony and electronic commerce. To meet
these requirements, Cisco chose the POWERTIER platform. For the Cisco IP Manager
product within the CSM system, POWERTIER application server caching enables
real-time simulation of network configuration changes, preventing costly network
outages. The POWERTIER development environment also enables Cisco to create a
common component framework that can be reused to reduce development time for
future CSM network services.
APPLICATION OUTSOURCING OVER THE INTERNET
CELERA GENOMICS. Celera provides gene discovery and characterization
services for drug discovery and development. Celera's GeneTag technology is a
novel gene expression analysis method that enables pharmaceutical companies to
develop new and potentially life-saving drugs by discovering and monitoring
genes involved in disease. Celera's BioScope software application allows
customers to access their data securely and remotely over the Internet. To allow
clients to quickly analyze and view the GeneTag results, Celera needed a
sophisticated software platform that could process hundreds of thousands of gene
expression comparisons while avoiding data bottlenecks. Celera selected
POWERTIER to achieve these goals. The BioScope application utilizes the
POWERTIER application server cache for high volume data analysis. With the
POWERTIER development environment, Celera has been able to use both the Java and
C++ languages to deliver the BioScope software application in only four months.
SALES AND MARKETING
We sell our products through both a direct sales force and third party
distributors. As of December 31, 2001, we had 40 people in our sales and
marketing organization, of which 25 were in the United States, 14 were in
European offices, and 1 was in our Asian office. We intend to increase the size
of our direct sales force as well as focusing on indirect distribution channels.
While our overall 2002 sales and marketing expense compared to 2001 is expected
to decrease, reductions in non-personnel related programs are expected to offset
expenses for new hirings.
Our sales cycle is relatively long, generally between three and nine months.
A successful sales cycle typically includes presentations to both business and
technical decision makers, as well as a limited pilot program to establish a
technical fit.
We have engaged in, and may continue to engage in, a variety of targeted
marketing activities, including focused advertising, public relations, seminars,
trade shows and customer-oriented web site management. We have also made
substantial marketing investments in education and training for the J2EE and C++
markets. We hold periodic seminars in order to train developers.
We intend to continue to develop and expand relationships with OEMs,
consultants, system integrators and independent software vendors (ISVs). We
believe these third parties can effectively market our products, particularly
EDGEXTEND, through their existing relationships with our target market
customers. We believe that these relationships will provide additional marketing
and sales channels for our products and facilitate the successful deployment of
customer applications. We are currently working with multiple consultants,
system integrators and ISV partners, including IBM and BEA, with whom we
announced partner agreements in 2001.
In international markets, we plan to expand our sales through indirect
channels, such as distributors and OEMs. As of December 31, 2001, we were
represented by 2 international distributors, both of whom sell our products in
Asia.
10
COMPETITION
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
o performance, including scalability, integrity and availability;
o ability to provide a complete software platform;
o flexibility;
o use of standards-based technology (e.g. J2EE);
o ease of integration with customers' existing enterprise systems;
o ease and speed of implementation;
o quality of support and service;
o security;
o company reputation; and
o price.
Our competitors for POWERTIER include both publicly and privately-held
enterprises, including BEA Systems (WebLogic), Secant Technologies, IBM
(WebSphere), Oracle (OAS) and Sun Microsystems (iPlanet). Many customers may not
be willing to purchase our POWERTIER, EDGEXTEND or DYNAMAI products because they
have already invested heavily in databases and other enterprise software
components offered by these competing companies. Many of these competitors have
pre-existing customer relationships, longer operating histories, greater
financial, technical, marketing and other resources, greater name recognition
and larger installed bases of customers than we do. In addition, some
competitors offer products that are less complex than our POWERTIER products and
require less customization to implement with potential customers' existing
systems. Thus, potential customers engaged in simpler business-to-business
e-commerce transactions may prefer these "plug-and-play" products to our more
complex offerings. Moreover, there are other very large and established
companies, including Microsoft, who offer alternative solutions and are thus
considered competitors. Further, dozens of companies have announced their
intention to support EJB/J2EE and may compete against us in the future. These
competitors and potential competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
we can. See also "Risk Factors -- Because we compete with Sun Microsystems, who
controls the EJB/J2EE standard, we face the risk that they may develop this
standard to favor their own products" and "-- Microsoft has established a
competing application server standard, which could diminish the market potential
for our products if it gains widespread acceptance."
In the POWERTIER for C++ market, many potential customers build their own
custom application servers, so we effectively compete against our potential
customers' internal information technology departments.
In the DYNAMAI market, similar dynamic Web content acceleration technology
is available from a variety of sources, including but not limited to internal
development, application server vendors such as Oracle, electronic commerce
software vendors such as Intershop and ATG, content delivery networks such as
Akamai and epicRealm, and emerging software and hardware appliance vendors such
as Chutney and Cachier, who are directly targeting DYNAMAI'S market.
In the EDGEXTEND market, similar technology is available from a variety of
sources, including the potential for internal development. Company vendors such
as Versant, webGain and Excelon are middleware vendors that offer alternative
data management solutions that directly target EDGEXTEND's market. Because we
enhance standard J2EE application servers, we face the risk that they may
develop similar functionality within their own products.
11
INTELLECTUAL PROPERTY RIGHTS
Our performance may depend on our ability to protect our proprietary rights
to the technologies used in our principal products. If we are not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and services, which would harm our business.
We rely on a combination of patents, copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights, but these legal means afford only limited protection. As
of February 28, 2002, we had five issued United States patents and two pending
United States patent applications with allowable subject matter. Despite any
measures taken to protect our intellectual property, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. In addition, the laws of some foreign countries may not
protect our intellectual property rights as fully as do the laws of the United
States. Thus, the measures we are taking to protect our intellectual property
rights in the United States and abroad may not be adequate. Finally, our
competitors may independently develop similar technologies.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. As the number of entrants
into our market increases, the possibility of an intellectual property claim
against us grows. For example, we may be inadvertently infringing a patent of
which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.
In March 1998, we entered into a license agreement with Sun Microsystems,
pursuant to which we granted Sun Microsystems rights to manufacture and sell, by
itself and not jointly with others, products under a number of our patents and
Sun Microsystems granted us rights to manufacture and sell, by ourselves and not
jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell competing products that would, in
the absence of this license agreement, infringe our patents. Under this
agreement, Sun Microsystems made a one-time payment to us. Neither Sun
Microsystems nor we can transfer the license without the consent of the other
party.
In January 2001, we entered into a license agreement with both webGain and
Secant to manufacture and sell products under three of our patents. Under this
agreement, both webGain and Secant made a one-time payment to us.
EMPLOYEES
As of December 31, 2001, we had 81 full-time employees, including 40 in
sales and marketing, 28 in research and development and technical services, and
13 in general and administrative functions. Our relationships with our employees
are generally good. From time to time, we also employ independent contractors to
support our sales and marketing, research and development, professional services
and administrative organizations.
12
EXECUTIVE OFFICERS
The following table sets forth specific information regarding our executive
officers as of February 28, 2002:
NAME AGE POSITION
---- --- --------
Christopher T. Keene.......41 Chief Executive Officer
Christine Russell..........52 Chief Financial Officer and Secretary
Derek Henninger............39 Vice President of Customer Care and CIO
Keith Zaky.................43 Vice President of Worldwide Field Operations
Ed Murrer..................52 Vice President of Marketing
Vivek Singhal..............33 Vice President of Engineering
Each executive officer serves at the sole discretion of the Board of
Directors.
CHRISTOPHER T. KEENE co-founded Persistence and has served as Chief
Executive Officer and a director since June 1991 and as Chairman of the Board
since April 1999. From June 1991 to April 1999, Mr. Keene also served as
President. Before founding Persistence, Mr. Keene worked at McKinsey & Company,
Ashton-Tate and Hewlett-Packard. Mr. Keene holds a B.S. degree in Mathematical
Sciences with honors from Stanford University and an M.B.A. degree from The
Wharton School at the University of Pennsylvania.
CHRISTINE RUSSELL joined Persistence in October 1997 and has served as Chief
Financial Officer and Secretary since December 1997. From October 1995 to
October 1997, she served as Chief Financial Officer for Cygnus Solutions, an
open source platform software company. Previously, Mrs. Russell was CFO of
Valence Technology and served in various senior financial positions with Shugart
Corporation, a subsidiary of Xerox. She holds a B.A. degree in English
Literature and an M.B.A. degree from Santa Clara University.
DEREK HENNINGER co-founded Persistence and served as Vice President of
Engineering from June 1991 until January 2002 when he became Vice President of
Customer Care and CIO. Previously, Mr. Henninger worked in the Data
Interpretation Division of Metaphor Corporation, a software and hardware
company, from September 1990 to June 1991. Mr. Henninger holds a B.A. degree in
Economics and a B.S. degree in computer Science and Mathematics from the
University of California at Davis.
KEITH ZAKY joined Persistence in October 2001 as Vice President, Worldwide
Field Operations. From June 1985 to December 1999, he worked in the Octel
Messaging Division of Lucent Technologies, a major networking company, most
recently as Vice President and General Manager of Asia Pacific. Mr. Zaky took a
planned sabbatical from December 1999 until August 2000. From August 2000 until
he joined Persistence, Mr. Zaky was Executive Vice President of Worldwide Field
Operations at AppGenesys.
ED MURRER joined Persistence in July 2001 as Vice President, Marketing. Mr.
Murrer was the Senior Vice President of Sales and Marketing at Xcert
International, an enterprise security software company, from March 2000 to March
2001 when Xcert was sold to RSA Security. From July 1997 to March 2000, Mr.
Murrer was Vice President, Business Development at Veridicom, a biometrics
security software company.
VIVEK SINGHAL joined Persistence in April 1995 as a Software Engineer. In
January 2002, he was promoted to Vice President, Engineering. He holds a B.S.
degree in Computer Science from the Massachusetts Institute of Technology and a
Ph.D. in Computer Science from the University of Texas at Austin.
13
ITEM 2. PROPERTIES.
We are headquartered in San Mateo, California, where we lease approximately
17,000 square feet of office space under a lease expiring on December 31, 2004.
We have an engineering staff facility in San Diego, where we lease approximately
6,000 square feet of office space under a lease expiring on August 31, 2004. We
also maintain sales offices in other U.S. states, the United Kingdom, Germany,
and Hong Kong. We believe that our existing facilities are adequate to meet our
current and foreseeable requirements or that suitable additional or substitute
space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently subject to any material legal proceedings. We may,
however, from time to time become a party to various legal proceedings that
arise in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK. Our common stock has been traded on the Nasdaq
National Market under the symbol PRSW since the effective date of our initial
public offering on June 24, 1999. Prior to the initial public offering, no
public market existed for our common stock. The price per share reflected in the
table below represents the range of low and high closing sale prices for our
common stock as reported in the Nasdaq National Market for the periods
indicated.
HIGH LOW
-------- --------
For The Year Ended December 31, 1999:
Second Quarter from June 24, 1999........................ $ 13.81 $ 11.00
Third Quarter............................................ $ 28.88 $ 12.63
Fourth Quarter........................................... $ 26.06 $ 8.25
For The Year Ended December 31, 2000:
First Quarter............................................ $ 23.63 $ 15.81
Second Quarter........................................... $ 21.38 $ 10.13
Third Quarter............................................ $ 20.75 $ 9.91
Fourth Quarter........................................... $ 12.00 $ 3.38
For The Year Ended December 31, 2001:
First Quarter............................................ $ 4.50 $ 1.00
Second Quarter........................................... $ 1.25 $ 0.48
Third Quarter............................................ $ 0.99 $ 0.15
Fourth Quarter........................................... $ 1.35 $ 0.19
We had 170 stockholders of record as of February 28, 2002, including several
holders who are nominees for an undetermined number of beneficial owners.
DIVIDEND POLICY. We have never paid dividends on our common stock or
preferred stock. We currently intend to retain any future earnings to fund the
development of our business. Therefore, we do not currently anticipate declaring
or paying dividends in the foreseeable future. In addition, our line of credit
agreement prohibits us from paying dividends.
USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. Our registration
statement on Form S-1, SEC File No. 333-76867, for our initial public offering
of common stock became effective on June 24, 1999. We registered and sold an
aggregate of 3,450,000 shares of common stock under the registration statement
at a per share price of $11.00. Our underwriters were BancBoston Robertson
Stephens, U.S. Bancorp Piper Jaffray, and Soundview Technology Group. Offering
proceeds, net of aggregate underwriting commissions and discounts of $2.7
million and other offering transaction expenses of $1.1 million, were $34.1
million. None of the underwriting commissions and discounts or other offering
transaction expenses were direct or indirect payments to our directors,
officers, or holders of 10% or more of our stock. From June 24, 1999 through
December 31, 2001, we have used the net offering proceeds as follows:
Working capital expenditures $21.5 million
Acquiring property and equipment 2.3 million
Acquiring technologies 2.9 million
-------------
26.7 million
Cash and cash equivalents 7.4 million
-------------
$34.1 million
Each of the above amounts represents our best estimate of our use of the net
proceeds. None of the net offering proceeds were paid directly or indirectly to
our directors, officers, or holders of 10% or more of our common stock.
15
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this report on Form 10-K. The
consolidated statements of operations data for the years ended December 31,
2001, 2000, and 1999 and the consolidated balance sheet data at December 31,
2001 and 2000, are derived from audited consolidated financial statements
included elsewhere in this report on Form 10-K. The consolidated statements of
operations data for the years ended December 31, 1998 and 1997, and the
consolidated balance sheet data as of December 31, 1999, 1998 and 1997 are
derived from audited financial statements not included in this report on Form
10-K.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License ......................................... $ 10,561 $ 17,684 $ 10,890 $ 7,478 $ 3,546
Service ......................................... 8,810 7,593 3,553 2,682 1,867
--------- --------- --------- --------- ---------
Total revenues .......................... 19,371 25,277 14,443 10,160 5,413
Loss from operations .............................. (15,391) (17,857) (12,165) (4,090) (4,686)
Net loss .......................................... $(15,132) $(16,726) $(11,306) $ (4,089) $ (4,674)
========= ========= ========= ========= =========
Basic and diluted net loss per share(1) ........... $ (0.76) $ (0.87) $ (0.86) $ (0.59) $ (0.73)
========= ========= ========= ========= =========
Shares used in basic and diluted net loss per share
calculation ....................................... 19,919 19,330 13,091 6,879 6,366
========= ========= ========= ========= =========
AS OF DECEMBER 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments . $ 7,411 $ 19,490 $ 29,652 $ 4,938 $ 2,610
Working capital ................................... 6,783 17,289 29,582 3,384 1,604
Total assets ...................................... 13,755 33,641 39,092 7,064 5,447
Long-term obligations ............................. 421 932 354 714 419
Total stockholders' equity ........................ 7,944 22,556 32,018 3,422 2,057
- ----------
(1) Basic net loss per common share excludes dilution and is computed by
dividing net loss by the weighted average number of common shares
outstanding for the period (excluding shares subject to repurchase). Diluted
net loss per common share was the same as basic net loss per common share
for all periods presented since the effect of any potentially dilutive
securities is excluded as they are anti dilutive because of the company's
net losses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our consolidated
financial statements as of December 31, 2001 and 2000 and for each of the years
ended December 31, 2001, 2000, and 1999, included elsewhere in this annual
report on Form 10-K. In addition, this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other parts of this annual
report on Form 10-K contain forward-looking statements that involve risks and
uncertainties. Words such as "anticipates," "believes," "plans," "targets,"
"expects," "future," "intends," and similar expressions identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those expressed or forecasted. Factors that might cause
such differences include, but are not limited to, those discussed in the section
entitled "Additional Factors That May Affect Future Results" and those appearing
elsewhere in this annual report on Form 10-K. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. We assume no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting forward-looking statements.
OVERVIEW
Persistence Software solves data access problems for distributed and
real-time systems. Persistence solutions help deliver better business visibility
for applications which require current information about customers, products and
16
suppliers. Persistence provides a suite of data management products that sit
between existing databases - such as Oracle and DB/2 - and/or application
servers - such as WebLogic and WebSphere. Developers can configure these
products to structure and position business information with optimal efficiency,
improving application server performance and simplifying application
distribution while reducing database costs.
Persistence is a leading provider of software for the management of
distributed data throughout an enterprise without the need for replicated data
centers. By effectively managing enterprise data, users achieve the benefit of
"business visibility" - the ability to manage their businesses in real time with
data and applications where they need them, when they need them. We were
incorporated and began operations in 1991. Our products incorporate patented
object-to-relational mapping and caching technologies. We have continually
enhanced our products, including a patented data transformation technology for
mapping objects to database tables, and caching capabilities.
In 1996, we developed our POWERTIER transactional application server, which
integrates all of the previously released Persistence products with new shared
transactional caching technologies, which enable multiple users to
simultaneously access the same cached data. We first shipped our POWERTIER for
C++ transactional application server in 1997. Sales of POWERTIER for C++
accounted for the majority of our revenues in 1997, 1998, and 1999, during which
years we added a professional services staff to enable our customers to
implement POWERTIER more rapidly. We were one of the first companies to adopt
and implement the J2EE (formerly known as EJB) specification. In 1998, we
introduced POWERTIER for EJB (now J2EE), which customers have frequently
purchased together with POWERTIER for C++. Our most recent version of POWERTIER
for J2EE is currently in use by several major customers and was commercially
released in September 2001. We currently plan to continue to focus product
development efforts on enhancements to both the POWERTIER for C++ and the
POWERTIER for J2EE products, as well as our EDGEXTEND product.
Our revenues, which consist of software license revenues and service
revenues, totaled $19.4 million in 2001, $25.3 million in 2000 and $14.4 million
in 1999. License revenues consist of licenses of our software products, which
generally are priced based on the number of users or servers. Service revenues
consist of professional services consulting, customer support and training.
Because we only commenced selling application servers in 1997, we have a limited
operating history in the application server market. We expect that, as a
percentage of total revenues, sales of POWERTIER for J2EE and EDGEXTEND products
will increase and sales of POWERTIER for C++ will decrease in the future.
We market our software and services primarily through our direct sales
organizations in the United States, the United Kingdom, Germany, and Hong Kong.
Revenues from licenses and services to customers outside the United States were
$7.4 million in 2001, $7.2 million in 2000 and $4.1 million in 1999 which
represented approximately 38% of total revenues for 2001, 28% for 2000 and 28%
for 1999. Our future success will depend, in part, on our successful development
of international markets for our products.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. Sales of products to our top
five customers accounted for 45% of total revenues in 2001, 40% of total
revenues in 2000 and 35% of total revenues in 1999. In addition, the identity of
our top five customers has changed from year to year. In the future, it is
likely that a relatively few large customers could continue to account for a
relatively large proportion of our revenues.
To date, we have sold our products primarily through our direct sales force.
We plan to hire sales people, in particular those with expertise in channel
sales, in order to meet our sales goals. In addition, our ability to achieve
significant revenue growth will depend in large part on our success in
establishing and leveraging relationships with OEM partners and other resellers.
We recognize revenues in accordance with the American Institute of Certified
Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended. Future implementation guidance relating to these
standards or any future standards may result in unanticipated changes in our
revenue recognition practices, and these changes could affect our future
revenues and earnings. In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 provided guidance on the recognition,
presentation and disclosure of revenue in the financial statements. SAB No. 101
outlines basic criteria that must be met to recognize revenue and provides
17
guidance for disclosure related to revenue recognition policies. The company
implemented SAB No. 101 in the fourth quarter of the year ended December 31,
2000. The provisions of SAB No. 101 did not have a material impact on the
company's consolidated financial position or results of operations.
We recognize license revenues upon shipment of the software if collection of
the resulting receivable is probable, an executed agreement has been signed, the
fee is fixed or determinable and vendor-specific objective evidence exists to
allocate a portion of the total fee to any undelivered elements of the
arrangement. Undelivered elements in these arrangements typically consist of
services. For sales made through distributors, revenue is recognized upon
shipment. Distributors have no right of return. We recognize revenues from
customer training, support and consulting services as the services are
performed. We generally recognize support revenues ratably over the term of the
support contract. If support or professional services are included in an
arrangement that includes a license agreement, amounts related to support or
professional services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price when such elements are sold separately, or, when not sold
separately, the price established by management having the relevant authority to
make such decision. Arrangements that require significant modification or
customization of software are recognized under the percentage of completion
method.
Since inception, we have incurred substantial research and development costs
and have invested heavily in the expansion of our sales, marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. The number of our employees decreased from 152 as of
December 31, 2000 to 81 as of December 31, 2001, representing a decrease of 47%.
We have incurred net losses in each quarter since 1996 and, as of December 31,
2001, had an accumulated deficit of $55.9 million. We are currently targeting
that sales and marketing expenses, research and development expenses, and
general and administrative expenses, will remain below the levels incurred
during 2001. We expect to achieve a modest net profit on a GAAP basis for 2002.
We believe that period-to-period comparisons of our operating results are
not meaningful and should not be relied upon as indicative of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets. We may
not achieve or maintain profitability in the future. Our success depends
significantly upon broad market acceptance of our POWERTIER for J2EE application
server and our more recently introduced caching products, DYNAMAI and EDGEXTEND.
Because Sun Microsystems controls the J2EE standard, we need to maintain a good
working relationship with them to develop future versions of POWERTIER for J2EE,
as well as additional products using the J2EE standard. Our performance will
also depend on the level of capital spending in our target market of customers
and on the growth and widespread adoption of the market for business-to-business
electronic commerce over the Internet.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to revenue recognition, bad
debts, intangible assets, income taxes, restructuring costs, and contingencies
and litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
- - 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. We follow specific and detailed guidelines in measuring and
recognizing revenue. Revenue results are difficult to forecast, and any
shortfall in revenue or delay in recognizing revenue could cause our operating
results to vary significantly from quarter to quarter and could result in future
operating losses.
18
- - BAD DEBTS. Our bad debt policy requires that we maintain a specific allowance
for certain doubtful accounts and a general allowance for the majority of the
non-specifically reserved accounts. These allowances provide for estimated
losses resulting from the inability or refusal of our customers to make required
payments. If the financial condition of the company's customers were to
deteriorate further, additional allowances would generally be required.
- - PURCHASED TECHNOLOGY AND INTANGIBLES. Our business acquisitions typically
resulted in goodwill and other intangible assets, which affect the amount of
future period amortization expense and possible impairment expense that we will
incur. The determination of the value of such intangible assets requires
management to make estimates and assumptions that affect our consolidated
financial statements and operating results. Accordingly in 2001, the company
took an impairment charge of $2.0 million.
- - INCOME TAXES. Our income tax policy records the estimated future tax effects
of temporary differences between the tax bases of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets, as well as
operating loss and tax credit carry-forwards. We follow specific and detailed
guidelines regarding the recoverability of any tax assets recorded on the
balance sheet and provide any necessary allowances as required.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES
Our revenues were $19.4 million for 2001 and $25.3 million for 2000
representing a decrease of 23%. International revenues were $7.4 million for
2001 and $7.2 million for 2000, representing an increase of 3%. For 2001, sales
to Salomon Smith Barney accounted for 15% of total revenues, sales to
Cablevision accounted for 11% of total revenues, and sales to our top five
customers accounted for 45% of total revenues. For 2000, sales to Salomon Smith
Barney accounted for 16% of total revenues and sales to our top five customers
accounted for 40% of total revenues.
LICENSE REVENUES. License revenues were $10.6 million for 2001 and $17.7
million for 2000, representing a decrease of 40%. License revenues represented
55% of total revenues for 2001 and 70% of total revenues for 2000. The decrease
in software license revenues was primarily due to a general reduction in
information technology spending for 2001, as compared to the more buoyant levels
experienced in 2000. This was particularly noticeable within our domestic
markets.
SERVICE REVENUES. Our service revenues were $8.8 million for 2001 and $7.6
million for 2000, representing an increase of 16%. The increase in service
revenues was primarily due to our focus upon significant consulting engagements
with Salomon Smith Barney and other key customers. Service revenues represented
45% of total revenues for 2001 and 30% of total revenues for 2000.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists of royalties,
packaging, documentation and associated shipping costs. Our cost of license
revenues was $14,000 for 2001 and $304,000 for 2000. The cost of license
revenues for 2000 included significant royalties that did not continue in 2001.
COST OF SERVICE REVENUES. Cost of service revenues consists of personnel,
contractors and other costs related to the provision of professional services,
technical support and training. Our cost of service revenues was $4.0 million
for 2001 and $3.6 million for 2000, representing an increase of 11%. This
increase was primarily due to the higher technical support revenues experienced
in 2001. As a percentage of service revenues, cost of service revenues were 45%
for 2001 and 47% for 2000. This decrease was due in part to the increase in our
technical support revenues. Cost of service revenues as a percentage of service
revenues may vary between periods due to our use of third party professional
services.
19
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, benefits, commissions and bonuses earned by sales and marketing
personnel, travel and entertainment, and promotional expenses. Our sales and
marketing expenses were $14.4 million for 2001 and $22.8 million for 2000,
representing a decrease of 37%. This decrease was primarily due to a general
reduction in marketing programs, a reduction in staff and lower commissions
based on lower sales revenues. Sales and marketing expenses represented 74% of
total revenues for 2001 and 90% of total revenues for 2000. We are presently
targeting that 2002 sales and marketing expense levels will be lower than
comparable 2001 expense levels.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits for software developers, technical managers
and quality assurance personnel as well as payments to external software
consultants. Our research and development expenses were $5.6 million for 2001
and $8.1 million for 2000, representing a decrease of 31%. This decrease was
primarily related to a reduction in staff and a reduction in the use of external
consultants. Research and development expenses represented 29% of total revenues
for 2001 and 32% of total revenues for 2000. We are presently targeting that
2002 research and development expense levels will be lower than comparable 2001
expense levels.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and executive management personnel, legal costs, bad debt
write-offs and various costs associated with our status as a public company. Our
general and administrative expenses were $5.5 million for 2001 and $5.4 million
for 2000, representing an increase of 2%. This increase was primarily the result
of patent litigation and settlement costs, offset by a reduction in personnel
expenses. General and administrative expenses represented 29% of total revenues
for 2001 and 21% of total revenues for 2000. We are presently targeting that
2002 general and administrative expense levels will be lower than comparable
2001 expense levels.
AMORTIZATION AND WRITE-DOWN OF PURCHASED INTANGIBLES. Amortization of
purchased intangibles was $3.6 million for 2001 and $2.9 million for 2000
representing an increase of 24%. The increase in amortization was primarily due
to write-off of intangibles and goodwill of $2.0 million in June 2001.
RESTRUCTURING COSTS. The Company restructured several functions within its
operations in 2001. This resulted in one-time charges of $1.7 million. The
majority of these charges related to severance and other employee related
benefit costs.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense)
consists primarily of earnings on our cash, cash equivalents and short-term
investment balances, offset by interest expense related to obligations under
capital leases and other borrowings, and various miscellaneous state and foreign
taxes, and other expenses. Interest and other income (expense) was $259,000 for
2001 and $1.1 million for 2000, representing a decrease of 76%. This decrease
was primarily due to a reduction in our short-term investment balances and a
general reduction in market interest rates. We expect that interest and other
income (expense) will decrease as we continue to use our net proceeds from our
initial public offering and may become a net expense in 2002.
STOCK-BASED COMPENSATION. Some options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value of
the stock price for accounting purposes was greater than the fair market value
of the stock as determined by the Board of Directors on the date of grant or
issuance. Total deferred stock compensation associated with equity transactions
as of December 31, 2001 was $119,000, net of amortization. Deferred stock
compensation is being amortized ratably over the vesting periods of these
securities. Amortization expense, which is included in operating expenses, was
$245,000 in 2001 and $416,000 in 2000. We expect to record amortization expense
related to these securities of approximately $120,000 in 2002.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
As of December 31, 2001, we had $48.4 million of federal and $9.5 million of
state net operating loss carryforwards available to offset future taxable
income. The federal net operating loss carryforwards expire through 2020, while
the state net operating loss carryforwards expire through 2011. The net
operating loss carryforwards for state tax purposes are substantially less than
for federal tax purposes, primarily because only 50% of state net operating loss
20
carryforwards can be utilized to offset future state taxable income and because
state net operating loss carryforwards generated in earlier years have already
expired. The Tax Reform Act of 1986 limits the use of net operating loss
carryforwards in situations where changes occur in the stock ownership of a
company. If we should be acquired or otherwise have an ownership change, as
defined in the Tax Reform Act of 1986, our utilization of these carryforwards
could be restricted.
As of December 31, 2001, the Company also had research and development tax
credit carryforwards of $1.5 million and $1.4 million available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires in 2021, while the state credit carryforward has no expiration.
We have placed a full valuation allowance against our net deferred tax
assets due to the uncertainty surrounding the realization of these assets. We
evaluate on a quarterly basis the recoverability of the net deferred tax assets
and the level of the valuation allowance. If and when we determine that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES
Our revenues were $25.3 million for 2000 and $14.4 million for 1999
representing an increase of 75%. International revenues were $7.2 million for
2000 and $4.1 million for 1999, representing an increase of 76%. For 2000, sales
to Salomon Smith Barney accounted for 16% of total revenues and sales to our top
five customers accounted for 40% of total revenues. For 1999, sales of products
and services to Cisco (a stockholder) accounted for 13% of our total revenues,
and sales of products and services to our top five customers accounted for 35%
of total revenues.
LICENSE REVENUES. License revenues were $17.7 million for 2000 and $10.9
million for 1999, representing an increase of 62%. License revenues represented
70% of total revenues for 2000 and 75% of total revenues for 1999. The increase
in software license revenues was primarily due to an increase in sales of our
POWERTIER for EJB application server and the increased size and productivity of
our sales team.
SERVICE REVENUES. Our service revenues were $7.6 million for 2000 and $3.6
million for 1999, representing an increase of 114%. The increase in service
revenues was primarily due to an increase in customer support fees related to
increased sales of our POWERTIER platform and an increase in our professional
services fees. Service revenues represented 30% of total revenues for 2000 and
25% of total revenues for 1999.
COST OF REVENUES
COST OF LICENSE REVENUES. Our cost of license revenues was $304,000 for 2000
and $170,000 for 1999. As a percentage of license revenues, cost of license
revenues remained flat at 2% for each of 2000 and 1999.
COST OF SERVICE REVENUES. Our cost of service revenues was $3.6 million for
2000 and $2.6 million for 1999, representing an increase of 36%. This increase
was primarily due to increased staffing, and occupancy costs. As a percentage of
service revenues, cost of service revenues were 47% for 2000 and 74% for 1999.
OPERATING EXPENSES
SALES AND MARKETING. Our sales and marketing expenses were $22.8 million for
2000 and $14.1 million for 1999, representing an increase of 62%. This increase
was primarily due to our investment in our sales and marketing infrastructure,
which included increases in staff related costs, sales commissions and
advertising and promotional events. Sales and marketing expenses represented 90%
of total revenues for 2000 and 97% of total revenues for 1999.
RESEARCH AND DEVELOPMENT. Our research and development expenses were $8.1
million for 2000 and $6.4 million for 1999, representing an increase of 28%.
This increase was primarily related to increases in staff related costs and
occupancy costs. Research and development expenses for 1999 also included a
one-time $303,000 compensation charge associated with the issuance of common
21
stock to an investor at a price which was less than the deemed fair value for
accounting purposes. Research and development expenses represented 32% of total
revenues for 2000 and 44% of total revenues for 1999.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses were
$5.4 million for 2000 and $2.8 million for 1999, representing an increase of
93%. This increase was primarily the result of staff related costs, professional
service providers, and bad debt reserves. This increase was primarily offset by
a decrease in occupancy costs. General and administrative expenses represented
21% of total revenues for 2000 and 20% of total revenues for 1999.
AMORTIZATION OF PURCHASED INTANGIBLES. Amortization of purchased intangibles
was $2.9 million for 2000 and $576,000 for 1999. The increase in amortization
was due to the increased level of purchased intangibles, primarily resulting
from our acquisition of additional purchased technology during 2000.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense) was
$1.1 million for 2000 and $859,000 for 1999, representing an increase of 32%.
STOCK-BASED COMPENSATION. Total deferred stock compensation associated with
equity transactions as of December 31, 2000 was $592,000, net of amortization.
Deferred stock compensation is being amortized ratably over the vesting periods
of these securities. Amortization expense, which is included in operating
expenses, was $416,000 in 2000 and $971,000 in 1999.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
22
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated statement of
operations data for each of the twelve quarters in the three-year period ended
December 31, 2001. This financial data is also expressed as a percentage of our
total revenues for the periods indicated. This data has been derived from our
unaudited consolidated financial statements, which have been prepared on the
same basis as the audited consolidated financial statements and, in the opinion
of our management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information when read in
conjunction with the consolidated financial statements and notes thereto. Our
quarterly results have been in the past, and may be in the future, subject to
significant fluctuations. As a result, we believe that results of operations for
interim periods should not be relied upon as any indication of the results to be
expected in any future period.
23
QUARTER ENDED
-------------------------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1999 1999 1999 1999 2000 2000 2000 2000 2001 2001
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License................ $ 2,116 $ 3,463 $ 1,747 $ 3,564 $ 2,881 $ 4,402 $ 5,356 $ 5,045 $ 2,131 $ 2,538
Service................ 747 784 878 1,144 1,329 1,556 1,728 2,980 2,735 2,213
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues....... 2,863 4,247 2,625 4,708 4,210 5,958 7,084 8,025 4,866 4,751
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
License................ 42 56 19 53 50 16 207 31 5 1
Service................ 580 695 490 868 715 902 857 1,118 1,173 1,189
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues 622 751 509 921 765 918 1,064 1,149 1,178 1,190
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 2,241 3,496 2,116 3,787 3,445 5,040 6,020 6,876 3,688 3,561
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 2,015 2,956 4,057 5,024 5,998 5,255 5,234 6,268 4,349 3,819
Research and development 1,806 1,305 1,533 1,713 2,013 2,213 2,042 1,859 1,748 1,583
General and administrative 383 538 1,146 753 867 1,492 1,649 1,423 1,374 1,394
Amortization of purchased
intangibles.......... -- 63 188 325 496 771 799 859 718 2,458
Restructuring costs.... -- -- -- -- -- -- -- -- 785 688
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses........... 4,204 4,862 6,924 7,815 9,374 9,731 9,724 10,409 8,974 9,942
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Loss from operations.... (1,963) (1,366) (4,808) (4,028) (5,929) (4,691) (3,704) (3,533) (5,286) (6,381)
Interest income (expense),
net................... 48 42 410 358 367 290 299 175 177 97
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net loss................ $(1,915) $(1,324) $(4,398) $(3,670) $(5,562) $(4,401) $(3,405) $(3,358) $(5,109) $(6,284)
======== ======== ======== ========= ======== ======== ======== ======== ======== ========
Shares used in calculating
basic and diluted net
loss per share.......... 7,044 7,860 18,449 18,739 18,968 19,148 19,418 19,667 19,791 19,916
======== ======== ======== ========= ======== ======== ======== ======== ======== ========
Basic and diluted net
loss per share.......... $ (0.27) $ (0.17) $ (0.24) $ (0.20) $ (0.29) $ (0.23) $ (0.18) $ (0.17) $ (0.26) $ (0.32)
======== ======== ======== ========= ======== ======== ======== ======== ======== ========
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License................ 73.9% 81.5% 66.6% 75.7% 68.4% 73.9% 75.6% 62.9% 43.8% 53.4%
Service................ 26.1 18.5 33.4 24.3 31.6 26.1 24.4 37.1 56.2% 46.6%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0% 100.0%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
License................ 1.5 1.3 0.7 1.1 1.2 0.3 2.9 0.4 0.1 0.0
Service................ 20.3 16.4 18.7 18.4 17.0 15.1 12.1 13.9 24.1 25.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues 21.7 17.7 19.4 19.6 18.2 15.4 15.0 14.3 24.2 25.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross margin............ 78.3 82.3 80.6 80.4 81.8 84.6 85.0 85.7 75.8 75.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 70.4 69.6 154.6 106.7 142.5 88.2 73.9 78.1 89.4 80.4
Research and development 63.1 30.7 58.4 38.0 47.8 37.1 28.8 23.2 35.9 33.3
General and
administrative....... 13.4 12.7 43.7 16.0 20.6 25.0 23.3 17.7 28.2 29.3
Amortization of purchased
intangibles.......... -- 1.5 7.2 5.2 11.8 12.9 11.3 10.7 14.8 51.7
Restructuring costs.... -- -- -- -- -- -- -- -- 16.1 14.5
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating 146.8 114.5 263.8 166.0 222.7 163.3 137.3 129.7 184.4 209.3
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
expenses................
Loss from operations.... (68.6) (32.2) (183.2) (85.6) (140.8) (78.7) (52.3) (44.0) (108.6) (134.3)
Interest income (expense),
net.................... 1.7 1.0 15.6 7.6 8.7 4.9 4.2 2.2 3.6 2.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net loss................ (66.9)% (31.2)% (167.5)% (78.0)% (132.4)% (73.9)% (48.1)% (41.8)% (105.0)% (132.3)
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
(CONTINUED BELOW)
24
QUARTER ENDED
-------------------
SEP. 30, DEC. 31,
2001 2001
-------- --------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License................ $ 3,114 $ 2,778
Service................ 2,056 1,806
-------- --------
Total revenues....... 5,170 4,584
-------- --------
Cost of revenues:
License................ 1 7
Service................ 975 636
-------- --------
Total cost of revenues 976 643
-------- --------
Gross profit............ 4,194 3,941
-------- --------
Operating expenses:
Sales and marketing.... 3,739 2,464
Research and development 1,229 1,018
General and administrative 1,464 1,287
Amortization of purchased
intangibles.......... 245 213
Restructuring costs.... 200 --
-------- --------
Total operating
expenses........... 6,877 4,982
-------- --------
Loss from operations.... (2,683) (1,041)
Interest income (expense),
net................... 14 (29)
-------- --------
Net loss................ $(2,669) $(1,070)
======== ========
Shares used in calculating
basic and diluted net
loss per share.......... 19,971 20,012
======== ========
Basic and diluted net
loss per share.......... $ (0.13) $ (0.05)
======== ========
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License................ 60.2% 60.6%
Service................ 39.8% 39.4%
-------- --------
Total revenues....... 100.0% 100.0%
-------- --------
Cost of revenues:
License................ 0.0 0.1
Service................ 18.9 13.9
-------- --------
Total cost of revenues 18.9 14.0
-------- --------
Gross margin............ 81.1 86.0
-------- --------
Operating expenses:
Sales and marketing.... 72.3 53.8
Research and development 23.8 22.2
General and
administrative....... 28.3 28.1
Amortization of purchased
intangibles.......... 4.7 4.6
Restructuring costs.... 3.9 0.0
-------- --------
Total operating 133.0 108.7
-------- --------
expenses................
Loss from operations.... (51.9) (22.7)
Interest income (expense),
net.................... 0.2 (0.6)
-------- --------
Net loss................ (51.7)% (23.3)%
======== ========
Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate significantly in the future, as a result of a
number of factors, many of which are outside our control. These factors include:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o demand for and market acceptance of our POWERTIER products and our newer
DYNAMAI and EDGEXTEND products;
o introduction of new products or services by us or our competitors;
o annual or quarterly budget cycles of our customers;
o the level of product and price competition in the application server and
distributed dynamic caching markets;
o our lengthy sales cycle;
o our success in maintaining our direct sales force and expanding indirect
distribution channels;
o the mix of direct sales versus indirect distribution channel sales;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in international markets and general economic conditions in
these markets.
The typical sales cycle of our products is long and unpredictable, and is
affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter to gain price concessions. Because a substantial portion of our
costs are relatively fixed and based on anticipated revenues, a failure to book
an expected order in a given quarter would not be offset by a corresponding
reduction in costs and could adversely affect our operating results.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through our initial
public offering of common stock in June 1999, which totaled $34.1 million in
aggregate net proceeds, and private sales of convertible preferred stock, which
totaled $19.9 million in aggregate net proceeds. We have also financed our
business through equipment-related loans in the maximum principal amount of
$800,000, a second equipment related loan in the amount of $655,000 and
capitalized leases. As of December 31, 2001, we had $7.4 million of cash and
cash equivalents and $6.8 million of working capital.
Net cash used in operating activities was $11.6 million for 2001, $11.7
million for 2000, and $10.9 million for 1999. For each of 2001, 2000 and 1999,
cash used for operating activities was attributable primarily to net operating
losses. These losses were offset by depreciation and amortization expenses.
Net cash provided by investing activities was $5.4 million for 2001. Net
cash used in investing activities was $108,000 for 2000, and $10.0 million for
1999. For 2001, cash provided by investing activities consisted primarily of the
sale of short-term investments. For 2000, cash used in investing activities
consisted of purchases of property and equipment and purchased intangibles,
offset by the sale of short-term investments. For 1999, cash used in investing
activities consisted primarily of purchases of short-term investments, purchased
intangibles and property and equipment.
25
Net cash used in financing activities was $500,000 for 2001. Net cash
provided by financing activities was $3.6 million for 2000 and $38.2 million for
1999. Net cash used in financing activities during 2001 consisted primarily of
repayments of capital leases and loan agreements offset by the sale of common
stock. Net cash provided by financing activities during 2000 and 1999 was
primarily attributable to the sale of common stock. For 2001 and 2000, net cash
was also provided from borrowings under an equipment financing facility, offset
by repayments of loan agreements.
We have credit facilities with Comerica Bank. Under those credit facilities,
the Company has a $5.0 million revolving line of credit facility available
through April 30, 2003, an $800,000 equipment term loan, and a second equipment
term loan of $655,000. As of December 31, 2001 we had no borrowings outstanding
under the revolving line of credit facility. As of December 31, 2001, we had a
promissory note in favor of Comerica Bank related to our first equipment term
loan, under which $67,000 out of an original $800,000 was outstanding. We are
required to make principal payments of $22,222 per month plus interest at 7.75%
per annum on the unpaid principal balance, payable in 36 monthly installments.
As of December 31, 2001 we had $502,000 outstanding under the second equipment
term loan. We are required to make principal payments of $21,843 per month, plus
interest at the bank's base rate plus 0.5% per annum payable in 30 monthly
installments. The bank's credit facilities require the Company, among other
things, to maintain a minimum tangible net worth of $7 million and a minimum
quick ratio (current assets not including inventory less current liabilities) of
2 to 1. As of both June 30, 2001 and September 30, 2001, the Company's tangible
net worth fell below the minimum tangible net worth ratio then in effect, and
the bank waived both of those previous events. As of December 31, 2001, we were
in compliance with our debt covenants. Borrowings under the facilities are
collateralized by substantially all of the Company's assets.
We believe that our current cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
through at least 2002. If cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities or to obtain a credit facility. If additional funds are raised
through the issuance of debt securities, these securities could have rights,
preferences and privileges senior to holders of common stock, and the term of
this debt could impose restrictions on our operations. The sale of additional
equity or convertible debt securities could result in additional dilution to our
stockholders, and we may not be able to obtain additional financing on
acceptable terms, if at all. If we are unable to obtain this additional
financing, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
No. 142 provides that intangible assets with finite useful lives be amortized
and that goodwill and intangible assets with indefinite lives will not be
amortized, but will rather be tested at least annually for impairment. The
Company adopted SFAS No. 142 for the fiscal year beginning January 1, 2002. The
impact of adopting this standard is not expected to be material to our financial
statements as the Company does not currently carry any goodwill or intangible
assets with indefinite lives.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale whether
previously held and used or newly acquired, and broadened the presentation of
discontinued operations to include more disposal transactions. SFAS No. 144 will
be effective for fiscal years beginning after December 15, 2001 and the Company
adopted the provisions of SFAS No. 144 as of January 1, 2002 but does not expect
SFAS No. 144 to have a material effect on the Company's financial position or
results of operations.
26
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the other
information contained in this annual report on Form 10-K as well as in our
quarterly reports on Form 10-Q. The risks and uncertainties described below are
intended to be the ones that are specific to our company or industry and that we
deem to be material, but are not the only ones that we face.
WE HAVE A LIMITED OPERATING HISTORY IN THE APPLICATION SERVER MARKET.
Because we only commenced selling application servers in 1997, we have a
limited operating history in the application server market. We thus face the
risks, expenses and difficulties frequently encountered by companies in early
stages of development, particularly companies in the rapidly changing software
industry. These risks include:
o the timing and magnitude of capital expenditures by our customers and
prospective customers;
o our substantial dependence for revenue from our POWERTIER for C++
product, which was first introduced in 1997 and has achieved only
limited market acceptance;
o our substantial dependence for revenue from our POWERTIER for EJB/J2EE
product, which was first introduced in 1998 and has achieved only
limited market acceptance;
o our need to expand our distribution capability through various sales
channels, including a direct sales organization, original equipment
manufacturers, third party distributors and systems integrators;
o our unproven ability to anticipate and respond to technological and
competitive developments in the rapidly changing market for application
servers;
o our unproven ability to compete in a highly competitive market;
o uncertainty as to the growth rate in the software infrastructure market;
o our need to achieve market acceptance for our new product introductions,
including DYNAMAI and EDGEXTEND;
o our dependence on Enterprise JavaBeans, commonly known as EJB/J2EE,
becoming a widely accepted standard in the transactional application
server market; and
o our dependence upon key personnel.
BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NEVER BECOME
OR REMAIN PROFITABLE.
We may not achieve our targeted revenues and we may not be able to achieve
or maintain profitability in the future. We have incurred net losses each year
since 1996. In particular, we incurred losses of $15.1 million in 2001, $16.7
million in 2000, $11.3 million in 1999, $4.1 million in 1998 and $4.7 million in
1997. As of December 31, 2001, we had an accumulated deficit of $55.9 million.
While we are currently targeting decreases in sales and marketing, research and
development, and general and administrative expenses for 2002 as compared to
such 2001 expenses, we will still need to achieve our revenue targets to become
profitable. Because our product markets are new and evolving, we cannot
accurately predict either the future growth rate, if any, or the ultimate size
of the market for our products.
WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK AND NOT THROUGH CASH
GENERATED BY OUR OPERATIONS.
27
Since inception, we have generally had negative cash flow from operations.
To date, we have financed our business primarily through sales of common stock
and convertible preferred stock and not through cash generated by our
operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE.
Based upon our current forecasts and estimates, we are targeting that our
current cash and cash equivalents will be sufficient to meet our anticipated
operating cash needs through at least December 31, 2002. However, we may need to
raise additional funds prior to that time. We face several risks in connection
with this possible need to raise additional capital:
o the issuance of additional securities could result in:
o debt securities with rights senior to the common stock;
o dilution to existing stockholders as a result of issuing additional
equity or convertible debt securities;
o debt securities with restrictive covenants that could restrict our
ability to run our business as desired; or
o securities issued on disadvantageous financial terms.
o the failure to procure needed funding could result in:
o a dramatic reduction in scope in our planned product development or
marketing efforts; or
o an inability to respond to competitive pressures or take advantage
of market opportunities.
If we are unable to obtain additional financing as and when needed and
on acceptable terms, we may be required to reduce the scope of our planned
product development and marketing efforts, which could jeopardize our business.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF
OUR COMMON STOCK.
Our quarterly operating results have fluctuated significantly in the past
and may continue to fluctuate significantly in the future as a result of a
number of factors, many of which are outside our control. In prior years, we
have often experienced an absolute decline in revenues from the fourth quarter
to the first quarter of the next year. If our future quarterly operating results
are below the expectations of securities analysts or investors, the price of our
common stock would likely decline. The factors that may cause fluctuations of
our operating results include the following:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o demand for and market acceptance of our POWERTIER products and our newer
DYNAMAI and EDGEXTEND products;
o the possible loss of sales people;
o introduction of new products or services by us or our competitors;
o annual or quarterly budget cycles of our customers;
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o the level of product and price competition in the application server and
distributed dynamic caching markets;
o our lengthy sales cycle;
o our success in maintaining our direct sales force and expanding indirect
distribution channels;
o the mix of direct sales versus indirect distribution channel sales;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in penetrating international markets and general economic
conditions in these markets.
We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. Because a
substantial portion of our costs are relatively fixed and based on anticipated
revenues, a failure to book an expected order in a given quarter would not be
offset by a corresponding reduction in costs and could adversely affect our
operating results.
OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO
IT IS DIFFICULT TO FORECAST OUR REVENUES.
Any delay in sales of our products or services could cause our quarterly
revenues and operating results to fluctuate. The typical sales cycle of our
products is long and unpredictable and requires both a significant capital
investment decision by our customers and our education of potential customers
regarding the use and benefits of our products. Our sales cycle is generally
between three and nine months. A successful sales cycle typically includes
presentations to both business and technical decision makers, as well as a
limited pilot program to establish a technical fit. Our products typically are
purchased as part of a significant enhancement to a customer's information
technology system. The implementation of our products involves a significant
commitment of resources by prospective customers. Accordingly, a purchase
decision for a potential customer typically requires the approval of several
senior decision makers. Our sales cycle is affected by the business conditions
of each prospective customer, as well as the overall economic climate for
technology-related capital expenditures. Due to the relative importance of many
of our product sales, a lost or delayed sale could adversely affect our
quarterly operating results. Our sales cycle is affected by seasonal
fluctuations as a result of our customers' fiscal year budgeting cycles and slow
summer purchasing patterns in Europe.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues from
sales to a limited number of customers. In the year ended December 31, 2001,
sales to our top five customers accounted for 45% of total revenues. Sales to
Salomon Smith Barney accounted for 15% of total revenues and sales to
Cablevision accounted for 11% of total revenues. In year ended December 31,
2000, sales to Salomon Smith Barney accounted for 16% of total revenues and
sales to our top five customers accounted for 40% of total revenues. In year
ended December 31, 1999, sales to Cisco accounted for 13% of our total revenues,
and sales to our top five customers accounted for 35% of total revenues. In year
ended December 31, 1998, sales to Cisco accounted for 14% of our total revenues,
sales to Instinet accounted for 17% of our total revenues, and sales to our top
five customers accounted for 55% of total revenues. In addition, the identity of
our top five customers has changed from year to year. If we lose a significant
customer, or fail to increase sales to an existing customer as planned, we may
not be able to replace the lost revenues with sales to other customers. In
addition, because our marketing strategy is to concentrate on sales to industry
leaders, any loss of a customer could harm our reputation within the industry
and make it harder for us to sell to other companies in that industry. The loss
of, or a reduction in sales to, one or more significant customers would likely
result in a decrease in our revenues.
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WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD
AND THE EMERGING MARKET FOR DISTRIBUTED OBJECT COMPUTING, AND IF THESE
TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD SUFFER.
We are focusing certain portions of our marketing efforts on our POWERTIER
for J2EE application server, which is based on three relatively new
technologies, which have not been widely adopted by a large number of companies.
These three technologies are a distributed object computing architecture, Sun
Microsystems' Java programming language and J2EE (formerly EJB). Distributed
object computing combines the use of software modules, or objects, communicating
across a computer network to software applications, such as our POWERTIER
application server. J2EE is the Java programming standard for use in an
application server. In 1998, we launched our PowerTier for EJB product, which is
a transactional application server that uses Java and conformed to the EJB
standard. Sun Microsystems released the EJB standard in 1998, and thus far EJB
has had limited market acceptance. Since our POWERTIER for J2EE product depends
upon the specialized J2EE standard, we face a limited market compared to
competitors who may offer application servers based on more widely accepted
standards, including the Java programming language. We expect a material portion
of our future revenues will come from sales of products based on the J2EE
standard. Thus, our success depends significantly upon broad market acceptance
of distributed object computing in general, and Java application servers in
particular. If J2EE does not become a widespread programming standard for
application servers, our revenues and business could suffer.
IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS
AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS.
The market for our products and services is characterized by rapid
technological change, dynamic customer demands and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovation in software applications and hardware
configurations and the emergence or adoption of new industry standards,
including Internet technology standards. We may need to increase our research
and development investment to maintain our technological leadership. Our future
success depends on our ability to continue to enhance our current products and
to continue to develop and introduce new products that keep pace with
competitive product introductions and technological developments. For example,
as Sun Microsystems introduces new J2EE specifications, we will need to
introduce new versions of POWERTIER for J2EE designed to support these new
specifications to remain competitive. If we do not bring enhancements and new
versions of our products to market in a timely manner, our market share and
revenues could decrease and our reputation could suffer. If we fail to
anticipate or respond adequately to changes in technology and customer needs, or
if there are any significant delays in product development or introduction, our
revenues and business could suffer.
Our EDGEXTEND products are currently in beta testing. Any delays in
releasing these products on a generally available basis may materially affect
our future revenues. EDGEXTEND for WebSphere is scheduled to be released in
March 2002. EDGEXTEND for WebLogic is scheduled to be released in June 2002.
WE ARE CURRENTLY TARGETING THAT SOME PORTION OF OUR REVENUES WILL BE DERIVED
FROM SALES OF OUR NEWEST PRODUCT, EDGEXTEND, HOWEVER THERE ARE TECHNICAL AND
MARKET RISKS ASSOCIATED WITH NEW PRODUCTS.
We are currently targeting that sales of our EDGEXTEND products will
represent some percentage of our revenues. New products, like EDGEXTEND, often
contain errors or defects, particularly when first introduced. Any errors or
defects could be serious or difficult to correct and could result in a delay of
product adoption resulting in lost revenues or a delay in gaining market share,
which could harm our revenues and reputation. In addition, market adoption is
often slower for newer products, like EDGEXTEND, than for existing products.
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO BUILD AND TRAIN AND MAINTAIN THIS TEAM MAY RESULT IN LOWER REVENUES.
We must maintain a strong direct sales team to generate revenues. In the
last several years, we have experienced significant turnover in our sales team,
and in the third quarter of 2001, we implemented a reduction in force and
substantially reorganized our sales team. In order to meet our future sales
goals, we may need to hire more salespeople for both our domestic and
international sales efforts. In the past, newly hired employees have required
30
training and approximately six to nine months experience to achieve full
productivity. Like many companies in the software industry, we are likely to
continue to experience turnover in our sales force. As a result of our recent
restructuring, a number of our sales people are relatively new and we may not
meet our sales goals. In addition, our recently hired employees may not become
productive, and we may not be able to hire enough qualified individuals in the
future.
BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES
CHANNEL THROUGH OEM PARTNERS AND OTHER RESELLERS, ANY FAILURE TO DEVELOP THIS
CHANNEL MAY RESULT IN LOWER REVENUES.
To date, we have sold our products primarily through our direct sales
force, but our ability to achieve significant revenue growth in the future will
depend in large part on our success in establishing and leveraging relationships
with OEM partners and third parties. It may be difficult for us to establish
these relationships, and, even if we establish these relationships, we will then
depend on the sales efforts of these third parties. In addition, because these
relationships are nonexclusive, these third parties may choose to sell
application servers or other alternative solutions offered by our competitors,
and not our products. If we fail to successfully build our third-party
distribution channels or if our third party partners do not perform as expected,
our business could be harmed.
BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM
DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES.
Because our products are often incorporated into multi-million dollar
enterprise projects, we depend on the successful and timely completion of these
large projects to fully deploy our products and achieve our revenue goals. These
enterprise projects often take many years to complete and can be delayed by a
variety of factors, including general or industry-specific economic downturns,
our customers' budget constraints, other customer-specific delays, problems with
other system components or delays caused by the OEM or other third-party
partners who may be managing the system deployment. If our customers cannot
successfully implement large-scale deployments, or they determine for any reason
that our products cannot accommodate large-scale deployments or that our
products are not appropriate for widespread use, our business could suffer. In
addition, if an OEM or other third-party partner fails to complete a project
utilizing our product for a customer in a timely manner, our revenues or
business reputation could suffer.
BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE EJB/J2EE APPLICATION
SERVER STANDARD, WE FACE THE RISK THAT IT MAY DEVELOP THIS STANDARD TO FAVOR ITS
OWN PRODUCTS.
Our success depends on achieving widespread market acceptance of our
POWERTIER for J2EE application server. Because Sun Microsystems controls the
J2EE standard, we need to maintain a good working relationship with Sun
Microsystems to develop future versions of POWERTIER for J2EE, as well as
additional products using J2EE, that will gain market acceptance. In March 1998,
we entered into a license agreement with Sun Microsystems, pursuant to which we
granted Sun Microsystems rights to manufacture and sell, by itself and not
jointly with others, products under a number of our patents, and Sun
Microsystems granted us rights to manufacture and sell, by ourselves and not
jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell some competing products that
would, in the absence of this license agreement, infringe our patents. Because
Sun Microsystems controls the J2EE standard, it could develop the J2EE standard
in a more proprietary way to favor a product offered by its subsidiary,
i-Planet, or a third party, which could make it much harder for us to compete in
the J2EE application server market.
MICROSOFT HAS ESTABLISHED A COMPETING APPLICATION SERVER STANDARD, WHICH COULD
DIMINISH THE MARKET POTENTIAL FOR OUR PRODUCTS IF IT GAINS WIDESPREAD
ACCEPTANCE.
Microsoft has established a competing standard for distributed computing,
COM, which includes an application server product. If this standard gains
widespread market acceptance over the J2EE or CORBA standards, on which our
products are based, our business would suffer. Because of Microsoft's resources
and commanding position with respect to other markets and technologies,
Microsoft's entry into the application server market may cause our potential
customers to delay or change purchasing decisions. We expect that Microsoft's
presence in the application server market will increase competitive pressure in
this market.
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WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE
HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
o performance, including scalability, integrity and availability;
o ability to provide a complete software platform;
o flexibility;
o use of standards-based technology (e.g. J2EE);
o ease of integration with customers' existing enterprise systems;
o ease and speed of implementation;
o quality of support and service;
o security;
o company reputation; and
o price.
Our competitors for POWERTIER, DYNAMAI and EDGEXTEND include both publicly
and privately-held enterprises, including BEA Systems (WebLogic), Secant
Technologies, IBM (WebSphere), Oracle (OAS) and i-Planet (Sun Microsystems).
Many customers may not be willing to purchase our POWERTIER platform because
they have already invested heavily in databases and other enterprise software
components offered by these competing companies. Many of these competitors have
preexisting customer relationships, longer operating histories, greater
financial, technical, marketing and other resources, greater name recognition
and larger installed bases of customers than we do. In addition, some
competitors offer products that are less complex than our POWERTIER products and
require less customization to implement with potential customers' existing
systems. Thus, potential customers engaged in simpler business-to-business
e-commerce transactions may prefer these "plug-and-play" products to our more
complex offerings. Moreover, there are other very large and established
companies, including Microsoft, who offer alternative solutions and are thus
indirect competitors. Further, dozens of companies have already supported, or
have announced their intention to support J2EE, and may compete against us in
the future. These competitors and potential competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than we can. In addition, in the POWERTIER for C++
market, many potential customers build their own custom application servers, so
we effectively compete against our potential customers' internal information
technology departments.
In the DYNAMAI market, similar dynamic Web content acceleration technology
is available from a variety of sources, including but not limited to internal
development, application server vendors such as Oracle, electronic commerce
software vendors such as Intershop and ATG, content delivery networks such as
Akamai and epicRealm, and emerging software and hardware appliance vendors such
as Chutney and Cachier, who are directly targeting Dynamai's market.
In the EDGEXTEND market, similar technology is available from a variety of
sources, including the potential for internal development. Company vendors such
as Versant, webGain and Excelon are middleware vendors that offer alternative
data management solutions that directly target EDGEXTEND's market. Because we
enhance standard J2EE application servers, we face the risk that they may
develop similar functionality within their own products.
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IF THE MARKET FOR INFRASTRUCTURE SOFTWARE FOR NETWORKS AND WEB-BASED PRODUCTS
AND SERVICES DOES NOT DEVELOP AS WE CURRENTLY ENVISION, OUR BUSINESS MODEL COULD
FAIL AND OUR REVENUES COULD DECLINE.
Our performance and future success will depend on the growth and widespread
adoption of the market for infrastructure software for networks and web-based
products and services. If this market does not develop in the manner we
currently envision, our business could be harmed. Moreover, critical issues
concerning the commercial use of the Internet, including security, cost,
accessibility and quality of network service, remain unresolved and may
negatively affect the growth of the Internet as a platform for conducting
various forms of electronic commerce. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols to handle increased activity or due to increased government
regulation.
OUR FAILURE TO MANAGE OUR RESOURCES COULD IMPAIR OUR BUSINESS.
Achieving our planned revenue targets and other financial objectives will
place significant demands on our management and other resources. Our ability to
manage our resources effectively will require us to continue to develop and
improve our operational, financial and other internal systems and controls, as
well as our business development capabilities, and to train, motivate and manage
our employees. If we are unable to manage our resources effectively, we may not
be able to retain key personnel and the quality of our services and products may
suffer.
OUR BUSINESS COULD SUFFER IF WE CANNOT ATTRACT AND RETAIN THE SERVICES OF KEY
EMPLOYEES.
Our future success depends on the ability of our management to operate
effectively, both individually and as a group. We are substantially dependent
upon the continued service of our existing executive personnel, especially
Christopher T. Keene, our Chief Executive Officer. We do not have a key person
life insurance policy covering Mr. Keene or any other officer or key employee.
Our success will depend in large part upon our ability to attract and retain
highly-skilled employees, particularly sales personnel and software engineers.
There is significant competition for skilled employees, especially for people
who have experience in both the software and Internet industries. We have
experienced significant turnover among sales personnel in recent years, which
makes retention more challenging, in particular as a result of our recent
restructurings. If we are not successful in attracting and retaining these
skilled employees, our sales and product development efforts would suffer. In
addition, if one or more of our key employees resigns to join a competitor or to
form a competing company, the loss of that employee and any resulting loss of
existing or potential customers to a competitor could harm our business. If we
lose any key personnel, we may not be able to prevent the unauthorized
disclosure or use of our technical knowledge or other trade secrets by those
former employees.
OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR
SOFTWARE MAY BE DELAYED.
Complex software products often contain errors or defects, particularly
when first introduced or when new versions or enhancements are released. Our
products have in the past contained and may in the future contain errors and
defects, which may be serious or difficult to correct and which may cause delays
in subsequent product releases. Delays in shipment of scheduled software
releases or serious defects or errors could result in lost revenues or a delay
in market acceptance, which could have a material adverse effect on our revenues
and reputation.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS.
Because our customers use our products for important business applications,
errors, defects or other performance problems could result in financial or other
damages to our customers. They could pursue claims for damages, which, if
successful, could result in our having to make substantial payments. Although
our purchase agreements typically contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions. A
product liability claim brought against us, even if meritless, would likely be
time consuming and costly for us to litigate or settle.
A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM INTERNATIONAL SALES, WHICH
COULD DECLINE AS A RESULT OF LEGAL, BUSINESS AND ECONOMIC RISKS SPECIFIC TO
INTERNATIONAL OPERATIONS.
33
Our future success will depend, in part, on our successful development of
international markets for our products. Approximately 40% of our total revenues
came from sales of products and services outside of the United States for the
three months ended December 31, 2001, and approximately 38% of our total
revenues came from sales of products and services outside of the United States
for the fiscal year 2001. We expect international revenues to continue to
represent a significant portion of our total revenues. To date, almost all of
our international revenues have resulted from our direct sales efforts. In
international markets, however, we expect that we will depend more heavily on
third party distributors to sell our products in the future. The success of our
international strategy will depend on our ability to develop and maintain
productive relationships with these third parties. The failure to develop key
international markets for our products could cause a reduction in our revenues.
Additional risks related to our international expansion and operation include:
o difficulties of staffing, funding and managing foreign operations;
o future dependence on the sales efforts of third party distributors to
expand business;
o longer payment cycles typically associated with international sales;
o tariffs and other trade barriers;
o failure to comply with a wide variety of complex foreign laws and
changing regulations;
o exposure to political instability and economic downturns;
o failure to localize our products for foreign markets;
o restrictions under U.S. law on the export of technologies;
o potentially adverse tax consequences;
o reduced protection of intellectual property rights in some countries;
and
o currency fluctuations.
The majority of our product sales outside the United States are denominated
in U.S. dollars. We do not currently engage in any hedging transactions to
reduce our exposure to currency fluctuations as a result of our foreign
operations. We are not currently ISO 9000 compliant, nor are we attempting to
meet all foreign technical standards that may apply to our products. Our failure
to develop our international sales channel as planned could cause a decline in
our revenues.
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION
MAY BE IMPAIRED.
Our success depends on our ability to protect our proprietary rights to the
technologies used in our products, and yet the measures we are taking to protect
these rights may not be adequate. If we are not adequately protected, our
competitors could use the intellectual property that we have developed to
enhance their products and services, which could harm our business. We rely on a
combination of patents, copyright and trademark laws, trade secrets,
confidentiality provisions and other contractual provisions to protect our
proprietary technology, but these legal means afford only limited protection.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. In addition, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States. We recently settled a lawsuit to
protect our intellectual property rights. Further litigation may be necessary to
enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
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WE MAY BE SUED FOR PATENT INFRINGEMENT.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. As the number of entrants
into our market increases, the possibility of an intellectual property claim
against us grows. For example, we may be inadvertently infringing a patent of
which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our current stockholders sell substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market, the market price of our common stock could fall. In
addition, these sales of common stock could impede our ability to raise funds at
an advantageous price, or at all, through the sale of securities. As of December
31, 2001, we had approximately 20,095,160 shares of common stock outstanding.
Virtually all of our shares, other than shares held by affiliates, are freely
tradable. In addition, shares held by affiliates are tradable, subject to the
volume and other restrictions of Rule 144.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
Our common stock price has been and may continue to be highly volatile, and
we expect that the market price of our common stock will continue to be subject
to significant fluctuations, as a result of variations in our quarterly
operating results and the overall volatility of the Nasdaq Stock Market. These
fluctuations have been, and may continue to be, exaggerated because an active
trading market has not developed for our stock. Thus, investors may have
difficulty buying or selling shares of our common stock at a desirable price, or
at all.
In addition, the market price of our common stock may rise or fall in the
future as a result of many factors, such as:
o variations in our quarterly results;
o announcements of technological innovations by us or our competitors;
o introductions of new products by us or our competitors;
o acquisitions or strategic alliances by us or our competitors;
o hiring or departure of key personnel;
o the gain or loss of a significant customer or order;
o changes in estimates of our financial performance or changes in
recommendations by securities analysts;
o market conditions and expectations regarding capital spending in the
software industry and in our customers' industries; and
o adoption of new accounting standards affecting the software industry.
The market prices of the common stock of many companies in the software and
Internet industries have experienced extreme price and volume fluctuations,
which have often been unrelated to these companies' operating performance. In
the past, securities class action litigation has often been brought against a
company after a period of volatility in the market price of its stock. We may in
the future be a target of similar litigation. Securities litigation could result
in substantial costs and divert management's attention and resources, which
could harm our business.
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OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
AND COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER
APPROVAL.
As of December 31, 2001, executive officers and directors, and entities
affiliated with them, owned approximately 21% of our outstanding common stock.
Accordingly, these stockholders may, as a practical matter, continue to control
the election of a majority of the directors and the determination of all
corporate actions. This concentration of voting control could have the effect of
delaying or preventing a merger or other change in control, even if it would
benefit our other stockholders.
THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER.
Provisions in our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
o establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
o authorizing the board to issue preferred stock;
o prohibiting cumulative voting in the election of directors;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent; and
o establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE
OUR STOCKHOLDERS.
As part of our business strategy, we expect to review acquisition prospects
that we believe would be advantageous to the development of our business. While
we have no current agreements or negotiations underway with respect to any major
acquisitions of third-party technology, we may make acquisitions of businesses,
products or technologies in the future. If we make any acquisitions, we could
take any or all of the following actions, any of which could materially and
adversely affect our financial results and the price of our common stock:
o issue equity securities that would dilute existing stockholders'
percentage ownership;
o incur substantial debt;
o assume contingent liabilities; or
o take substantial charges in connection with the impairment of goodwill
and amortization of other intangible assets.
Acquisitions also entail numerous risks, including:
o difficulties in assimilating acquired operations, products and personnel
with our pre-existing business;
o unanticipated costs;
o diversion of management's attention from other business concerns;
36
o adverse effects on existing business relationships with suppliers and
customers;
o risks of entering markets in which we have limited or no prior
experience; and
o potential loss of key employees from either our preexisting business or
the acquired organization.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business.
WE HAVE NOT DESIGNATED ANY SPECIFIC USE FOR THE NET PROCEEDS OF THE COMPANY'S
INITIAL PUBLIC OFFERING OF COMMON STOCK, AND THUS MAY USE THE REMAINING NET
PROCEEDS TO FUND GENERAL OPERATIONS, FOR ACQUISITIONS OR FOR OTHER CORPORATE
PURPOSES.
We have not designated any specific use for the net proceeds of our initial
public offering of common stock. As a result, our management and board of
directors have broad discretion in spending the remaining net proceeds of that
offering. We currently expect to use the remaining net proceeds primarily for
working capital and general corporate purposes, funding product development and
funding our sales and marketing organization. In addition, we may use a portion
of the remaining net proceeds for further development of our product lines
through acquisitions of products, technologies and businesses.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY. Our operating results are sensitive to changes in
the general level of U.S. interest rates. If market interest rates had changed
by ten percent in 2001, our operating results would have changed by
approximately $33,000. As of December 31, 2001, most of our cash equivalents
were invested in money market accounts and, thus, the principal values are not
susceptible to changes in short-term interest rates.
FOREIGN CURRENCY FLUCTUATIONS. We have certain operating transactions in
foreign currencies, and maintain balances that are due or payable in foreign
currencies at December 31, 2001. We estimate that a hypothetical ten percent
change in foreign currency rates in 2001 would have impacted our financial
results of operations by approximately $12,000. On a net asset basis, a
hypothetical ten percent change in foreign currency rates at December 31, 2001
would impact our stockholders' equity by approximately $32,000. We do not hedge
any of our foreign currency exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the consolidated financial statements and
supplementary data that are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
37
PART III
The Company's Proxy Statement for its 2002 Annual Meeting of Stockholders,
when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934,
will be incorporated by reference in this Form 10-K pursuant to General
Instruction G(3) of Form 10-K and will provide the information required under
Part III (Items 10-13), except for the information with respect to the Company's
executive officers, which is included in "Item 1.
Business-- Executive Officers."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS AND REPORT OF DELOITTE & TOUCHE LLP (pages F-1
through F-17):
Audited Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 2001, 2000
and 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULE (pages S-1 through S-3)
Audited Consolidated Financial Statement Schedule:
Independent Auditors' Report
Schedule II -- Consolidated Schedule of Valuation and Qualifying
Accounts for the years ended December 31, 2001, 2000 and 1999
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
38
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.2* Amended and Restated Certificate of Incorporation of Persistence.
3.4** Amended and Restated Bylaws of Persistence, as amended on March 2, 2001.
4.1* Specimen Stock Certificate.
4.2*** Common stock warrant, warrant No. W-CS1, dated June 28, 2001, issued to RCG Capital Markets Group, Inc.
10.1* Form of Common Stock Purchase Agreement between Persistence and each of Christopher T. Keene and Derek P.
Henninger.
10.2* Fifth Amended and Restated Investor Rights Agreement dated February 19, 1999 among Persistence and certain
investors.
10.4* Form of Change of Control Agreement between Persistence and Christine Russell.
10.5* 1994 Stock Purchase Plan (as amended) and Form of Common Stock Purchase Agreement.
10.6*** 1997 Stock Plan (as amended) and Forms of Stock Option Agreement and Common Stock Purchase Agreement.
10.7* 1999 Employee Stock Purchase Plan and Form of Subscription Agreement.
10.8*** 1999 Directors' Stock Option Plan and Form of Option Agreement.
10.9* Lease dated June 12, 1991 between Persistence and Great American Bank (as amended).
10.10*+ Settlement and License Agreement dated March 23, 1998 between Persistence and Sun Microsystems, Inc.
10.11* Form of Indemnification Agreement between Persistence and officers and directors.
10.12*** Registration Rights Agreement dated as of June 28, 2001 between Persistence and RCG Capital Markets Group, Inc.
10.13 Amended and Restated Loan Agreement between Persistence and Comerica Bank.
10.14 Lease Amendment dated February 5, 2002 between Persistence and Cornerstone Properties I, LLC.
10.15 Form of Change of Control Agreement between Persistence and each of Keith Zaky and Ed Murrer.
21.1* List of subsidiaries.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney (see page 40).
- ----------
* Incorporated herein by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (Commission File No. 333-76867).
** Incorporated herein by reference to the exhibit filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
*** Incorporated herein by reference to the exhibit filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
+ Certain information in this Exhibit has been omitted and filed separately with
the Commission. Confidential treatment has been granted with respect to the
omitted portions.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K for the fiscal year ended December 31, 2001 to be signed on its behalf by
the undersigned, thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ CHRISTOPHER T. KEENE
--------------------------------------------
Christopher T. Keene
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
By: /s/ CHRISTINE RUSSELL
--------------------------------------------
Christine Russell
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer)
Date: March 25, 2002
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Christine Russell his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorney-in-fact, or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CHRISTOPHER T. KEENE Chairman of the Board and Chief Executive March 25, 2002
- ----------------------------------------- Officer (Principal Executive Officer)
Christopher T. Keene
/s/ CHRISTINE RUSSELL Chief Financial Officer (Principal Financial March 25, 2002
- ----------------------------------------- and Accounting Officer)
Christine Russell
/s/ ALAN KING Director March 25, 2002
- -----------------------------------------
Alan King
/s/ SANJAY VASWANI Director March 25, 2002
- -----------------------------------------
Sanjay Vaswani
/s/ JOSEPH P. ROEBUCK Director March 25, 2002
- -----------------------------------------
Joseph P. Roebuck
40
PERSISTENCE SOFTWARE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Audited Consolidated Financial Statements:
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets at December 31, 2001 and 2000.............. F-3
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999.................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 2001, 2000
and 1999............................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999.................................................. F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Persistence Software, Inc.:
We have audited the accompanying consolidated balance sheets of Persistence
Software, Inc. and its subsidiaries (the "Company") as of December 31, 2001 and
2000, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive loss, and cash flows for each of the
three years in the period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
January 22, 2002
(February 28, 2002 as to Note 5 and March 20, 2002 as
to Note 12)
F-2
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
ASSETS
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
Current assets:
Cash and cash equivalents................................................................. $ 7,411 $ 14,103
Short-term investments.................................................................... -- 5,387
Accounts receivable, net of allowances of $152 and $1,228, respectively................... 4,106 7,121
Prepaid expenses and other current assets................................................. 656 831
----------- -----------
Total current assets................................................................. 12,173 27,442
Property and equipment, net................................................................. 796 1,777
Purchased intangibles, net of amortization of $1,088 and $2,984, respectively............... 722 4,310
Other assets................................................................................ 64 112
----------- -----------
Total assets......................................................................... $ 13,755 $ 33,641
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 1,070 $ 1,657
Accrued compensation and related benefits................................................. 892 2,787
Other accrued liabilities................................................................. 457 1,731
Deferred revenues......................................................................... 2,124 2,682
Current portion of long-term obligations.................................................. 847 1,296
----------- -----------
Total current liabilities............................................................ 5,390 10,153
Long-term obligations....................................................................... 421 932
----------- -----------
Total liabilities.................................................................... 5,811 11,085
----------- -----------
Commitments (Note 5)
Stockholders' equity:
Preferred stock, $0.001 par value; authorized -- 5,000,000 shares;
designated and outstanding--none......................................................... -- --
Common stock, $0.001 par value; authorized -- 75,000,000 shares;
outstanding -- 2001, 20,036,588 shares; 2000, 19,878,712 shares;......................... 64,036 63,994
Deferred stock compensation............................................................... (119) (592)
Notes receivable from stockholders........................................................ (54) (94)
Accumulated deficit....................................................................... (55,930) (40,798)
Accumulated other comprehensive income.................................................... 11 46
----------- -----------
Total stockholders' equity........................................................... 7,944 22,556
----------- -----------
Total liabilities and stockholders' equity........................................... $ 13,755 $ 33,641
=========== ===========
See notes to consolidated financial statements.
F-3
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenues:
License..................................................................... $ 10,561 $ 17,684 $ 10,890
Service..................................................................... 8,810 7,593 3,553
----------- ----------- -----------
Total revenues......................................................... 19,371 25,277 14,443
----------- ----------- -----------
Cost of revenues:
License..................................................................... 14 304 170
Service..................................................................... 3,973 3,592 2,633
----------- ----------- -----------
Total cost of revenues................................................. 3,987 3,896 2,803
----------- ----------- -----------
Gross profit.................................................................. 15,384 21,381 11,640
Operating expenses:
Sales and marketing......................................................... 14,371 22,755 14,052
Research and development.................................................... 5,578 8,127 6,357
General and administrative.................................................. 5,519 5,431 2,820
Amortization and write-down of purchased intangibles........................ 3,634 2,925 576
Restructuring costs......................................................... 1,673 -- --
----------- ----------- -----------
Total operating expenses............................................... 30,775 39,238 23,805
----------- ----------- -----------
Loss from operations.......................................................... (15,391) (17,857) (12,165)
Interest and other income (expense):
Interest income............................................................. 394 1,401 975
Interest expense............................................................ (68) (60) (116)
Other, net.................................................................. (67) (210) --
----------- ----------- -----------
Total interest and other income (expense).............................. 259 1,131 859
----------- ----------- -----------
Net loss...................................................................... $ (15,132) $ (16,726) $ (11,306)
=========== =========== ===========
Basic and diluted net loss per share.......................................... $ (0.76) $ (0.87) $ (0.86)
=========== =========== ===========
Shares used in calculating basic and diluted net loss per share............... 19,919 19,330 13,091
=========== =========== ===========
See notes to consolidated financial statements.
F-4
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE OTHER
------------------------ ---------------------- STOCK FROM ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT COMPENSATION STOCKHOLDERS DEFICIT (LOSS)/INCOME
----------- ---------- ----------- ---------- ---------- --------- ----------- ---------
Balances, January 1, 1999.... 6,922,184 $ 15,717 7,634,414 $ 2,854 (2,222) $ (161) (12,766)
Net loss..................... (11,306)
Change in unrealized (loss) on
investments................ $ (10)
Comprehensive loss...........
Sale of Series D preferred
stock...................... 775,701 4,142
Conversion of preferred stock
to common stock............ (7,697,885) (19,859) 7,697,885 19,859
Issuance of common stock, net
of repurchases............. 3,937,405 34,799
Reversal of stock arrangements
due to cancellations....... (45) 45
Amortization of deferred
stock compensation......... 971
----------- ---------- ----------- ---------- ---------- --------- ----------- ---------
Balances, December 31, 1999.. -- -- 19,269,704 57,467 (1,206) (161) (24,072) (10)
Net loss..................... (16,726)
Change in unrealized gain on
investments................ 10
Cumulative translation 46
adjustment.................
Comprehensive loss...........
Issuance of common stock, net
of repurchases............. 609,008 6,725
Collection of notes receivable
from stockholders.......... 67
Reversal of stock arrangements
due to cancellations......... (198) 198
Amortization of deferred
stock compensation......... 416
----------- ---------- ----------- ---------- ---------- --------- ----------- ---------
Balances, December 31, 2000.. -- $ -- 19,878,712 $ 63,994 $ (592) $ (94) $ (40,798) $ 46
Net loss..................... (15,132)
Cumulative translation
adjustment................... (35)
Comprehensive loss...........
Issuance of common stock, net
of repurchases............. 157,876 270
Collection of notes receivable
from stockholders.......... 40
Issuance of stock warrants... 53 (53)
Reversal of stock arrangements
due to cancellations....... (281) 281
Amortization of deferred
stock compensation......... 245
----------- ---------- ----------- ---------- ---------- --------- ----------- ---------
Balances, December 31, 2001.. -- $ -- 20,036,588 $ 64,036 $ (119) $ (54) $ (55,930) $ 11
========== ========== =========== ========== ========== ========= ========== =========
(CONTINUED BELOW)
See notes to consolidated financial statements.
F-5
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
TOTAL
COMPREHENSIVE
TOTAL LOSS
---------- ---------
Balances, January 1, 1999.... $ 3,422
Net loss..................... (11,306) $(11,306)
Change in unrealized (loss) on
investments................ (10) (10)
---------
Comprehensive loss........... $(11,316)
=========
Sale of Series D preferred
stock...................... 4,142
Conversion of preferred stock
to common stock............ --
Issuance of common stock, net
of repurchases............. 34,799
Reversal of stock arrangements
due to cancellations....... --
Amortization of deferred
stock compensation......... 971
----------
Balances, December 31, 1999.. 32,018
Net loss..................... (16,726) $(16,726)
Change in unrealized gain on
investments................ 10 10
Cumulative translation 46 46
adjustment................. ---------
Comprehensive loss........... $(16,670)
=========
Issuance of common stock, net
of repurchases............. 6,725
Collection of notes receivable
from stockholders.......... 67
Reversal of stock arrangements
due to cancellations......... --
Amortization of deferred
stock compensation......... 416
----------
Balances, December 31, 2000.. $ 22,556
Net loss..................... (15,132) $(15,132)
Cumulative translation
adjustment................. (35) (35)
---------
Comprehensive loss........... $(15,167)
Issuance of common stock, net =========
of repurchases............. 270
Collection of notes receivable
from stockholders.......... 40
Issuance of stock warrants... --
Reversal of stock arrangements
due to cancellations....... --
Amortization of deferred
stock compensation......... 245
----------
Balances, December 31, 2001.. $ 7,944
==========
See notes to consolidated financial statements.
F-5
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $ (15,132) $ (16,726) $ (11,306)
Adjustments to reconcile net loss to net cash used in
operating activities:
Allowance for doubtful accounts...................................... 951 896 285
Depreciation and amortization........................................ 2,275 3,842 1,135
Write-down of purchased intangibles.................................. 1,988 -- --
Loss on sale of fixed assets......................................... 164 -- --
Amortization of deferred stock compensation.......................... 245 416 971
Changes in operating assets and liabilities:
Accounts receivable................................................ 2,064 (2,332) (4,211)
Prepaid expenses and other current assets.......................... 175 (265) (1,000)
Accounts payable................................................... (587) 287 774
Accrued compensation and related benefits.......................... (1,895) 983 1,292
Other accrued liabilities.......................................... (1,274) 537 1,040
Deferred revenues.................................................. (558) 667 217
Deferred rent...................................................... -- -- (64)
----------- ----------- -----------
Net cash used in operating activities........................... (11,584) (11,695) (10,867)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments.................................................. 5,387 1,965 (7,362)
Purchase of property and equipment...................................... (101) (1,422) (919)
Proceeds from sale of property and equipment............................ 93 -- --
Acquisition of purchased intangibles.................................... -- (619) (1,663)
Deposits and other...................................................... 48 (32) (41)
----------- ----------- -----------
Net cash provided by/(used) in investing activities............. 5,427 (108) (9,985)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of convertible preferred stock, net................................ -- -- 4,142
Sale of common stock, net of repurchases................................ 270 3,465 34,440
Repurchase of common stock.............................................. -- (1) (1)
Collection of notes receivable from stockholders........................ 40 67 --
Repayment of capital lease obligations.................................. (43) (77) (167)
Repayment of obligations incurred to acquire purchased intangibles...... (470) (160) --
Borrowing under loan agreement.......................................... 122 533 --
Repayment under loan agreements......................................... (419) (267) (200)
----------- ----------- -----------
Net cash provided by/(used) in financing activities............. (500) 3,560 38,214
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.............. (35) 46 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS:
Net increase (decrease)................................................. (6,692) (8,197) 17,362
Beginning of year....................................................... 14,103 22,300 4,938
----------- ----------- -----------
End of year............................................................. $ 7,411 $ 14,103 $ 22,300
=========== =========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment under capital leases.............. $ -- $ 73 $ --
=========== =========== ===========
Long-term obligations incurred to acquire purchased intangibles......... $ (150) $ 1,435 $ --
=========== =========== ===========
Release of compensatory stock arrangements.............................. $ 281 $ -- $ --
=========== =========== ===========
Compensatory stock arrangements......................................... $ (53) $ -- $ --
=========== =========== ===========
Common stock issued for purchased intangibles........................... $ -- $ 3,063 $ 360
=========== =========== ===========
Conversion of convertible preferred stock into common stock............. $ -- $ -- $ 19,859
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- CASH
PAID DURING THE YEAR FOR:
Interest ............................................................... $ 68 $ 60 $ 114
=========== =========== ===========
Income taxes............................................................ $ 66 $ 132 $ 3
=========== =========== ===========
See notes to consolidated financial statements.
F-6
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Persistence Software solves data access problems for distributed
and real-time systems. Persistence solutions help deliver better business
visibility for applications which require current information about customers,
products and suppliers.
Persistence provides a suite of data management products that sit between
existing databases - such as Oracle and DB/2 - and application servers - such as
WebLogic and WebSphere. Developers can configure these products to structure and
position business information with optimal efficiency, improving application
server performance and simplifying application distribution while reducing
database costs.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
CASH EQUIVALENTS -- The Company considers all highly liquid debt instruments
purchased with remaining maturities of less than three months to be cash
equivalents.
SHORT-TERM INVESTMENTS -- Short-term investments consist primarily of highly
liquid debt and equity instruments purchased with remaining maturity dates of
greater than 90 days but less than 12 months. Management determines the
classification of debt and equity securities at the time of purchase and
reevaluates the classification at each balance sheet date. Debt securities are
classified as available-for-sale when the Company generally has the ability and
intent to hold such securities to maturity, but, in certain circumstances, may
potentially dispose of such securities prior to their maturity. Securities
available-for-sale are reported at fair value with unrealized gains and losses
reported as a separate component of stockholders' equity. All available-for-sale
securities are classified as current assets. At December 31, 2001, the Company
had no short-term investments. At December 31, 2000, short-term investments
consisted of corporate debt securities (commercial paper) and U.S. government
debt securities with maturities of less than one year.
Short-term investments and money market funds include the following
available-for-sale securities at December 31, 2001 (in thousands):
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
---------- --------- --------- ----------
(IN THOUSANDS)
Money market funds...................................... $ 4,485 -- -- $ 4,485
---------- --------- --------- ----------
Total available-for-sale securities........... $ 4,485 $ -- $ -- $ 4,485
========== ========= ========= ==========
Included in cash equivalents............................ $ 4,485
Included in short-term investments...................... --
----------
Total available-for-sale securities........... $ 4,485
==========
Short-term investments and money market funds include the following
available-for-sale securities at December 31, 2000 (in thousands):
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
---------- --------- --------- ----------
(IN THOUSANDS)
Money market funds...................................... $ 1,863 $ 1,863
Commercial paper........................................ 7,888 7,888
U.S. government agencies................................ 6,615 6,615
---------- --------- --------- ----------
Total available-for-sale securities........... $ 16,366 $ -- $ -- $ 16,366
========== ========= ========= ==========
Included in cash equivalents............................ $ 10,979
Included in short-term investments...................... 5,387
----------
Total available-for sale-securities........... $ 16,366
==========
F-7
PROPERTY AND EQUIPMENT are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of three
years. Leasehold improvements are amortized over the shorter of the lease term
or their useful life.
PURCHASED INTANGIBLES are stated at cost. Amortization is computed using the
straight-line method over the estimated useful lives of two to three years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF --
The Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. In June 2001, the Company
determined that certain intangible assets were impaired and, thus, recorded a
write-down of $2.0 million. Refer to Note 2.
SOFTWARE DEVELOPMENT COSTS -- Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional costs would be capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, COMPUTER SOFTWARE TO BE SOLD,
LEASED OR OTHERWISE MARKETED. Because the Company believes its current process
for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
NOTES RECEIVABLE FROM STOCKHOLDERS -- The notes receivable from stockholders
were issued at market rates in exchange for common stock, bear interest at 5.93%
per annum, and are due in December 2003. (Refer to Note 12.) The notes are
full-recourse.
REVENUE RECOGNITION -- Revenue consists primarily of fees for licenses of
the Company's software products, maintenance and customer support.
LICENSE REVENUE -- Revenue from software licenses is recognized upon
shipment of the software if collection of the resulting receivable is
probable, an executed agreement has been signed, the fee is fixed or
determinable and vendor-specific objective evidence exists to allocate a
portion of the total fee to any undelivered elements of the arrangement.
Such undelivered elements in these arrangements typically consist of
services. For sales made through distributors, revenue is recognized upon
shipment. Distributors have no right of return.
SERVICE REVENUE -- Revenue from customer training, support and
consulting services is recognized as the services are performed. Support
revenue is recognized ratably over the term of the support contract. If
support or professional services are included in an arrangement that
includes a license agreement, amounts related to support or professional
services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price when such elements are sold separately, or, when not sold
separately, the price established by management having the relevant
authority. Arrangements which require significant modification or
customization of software are recognized under the percentage of completion
method.
INCOME TAXES -- Income taxes are provided using an asset and liability
approach which requires recognition of deferred tax liabilities and assets, net
of valuation allowances, for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities and net operating loss and tax credit carryforwards.
FOREIGN CURRENCY TRANSACTIONS -- The functional currencies of the Company's
foreign subsidiaries are the British Pound Sterling, German Mark and the Hong
Kong Dollar. Accordingly, all monetary assets and liabilities are translated at
F-8
the current exchange rate at the end of the year, nonmonetary assets and
liabilities are translated at historical rates and net sales and expenses are
translated at average exchange rates in effect during the period. Translation
gains and losses, which are included in the balance sheets and in other
comprehensive income (loss) in the accompanying consolidated statements of
changes in stockholders' equity, have not been significant.
STOCK COMPENSATION -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
Accordingly, no accounting recognition is given to employee stock options
granted with an exercise price equal to fair market value of the underlying
stock on the grant date. Upon exercise, the net proceeds and any related tax
benefit are credited to stockholders' equity.
NET LOSS PER COMMON SHARE -- Basic net loss per common share excludes
dilution and is computed by dividing net loss by the weighted average number of
common shares outstanding for the period (excluding shares subject to
repurchase). Diluted net loss per common share was the same as basic net loss
per common share for all periods presented. This result is due to the exclusion
of all potentially dilutive securities, which are anti-dilutive because of the
Company's net losses.
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, short-term investments, and trade receivables. The risk
associated with cash and cash equivalents and short-term investments is
mitigated by using only high-quality financial institutions and investing in
high-grade debt securities. The Company primarily sells its products to
companies in the United States and Europe. The Company does not require
collateral or other security to support accounts receivable. To reduce credit
risk, management performs ongoing credit evaluations of its customers' financial
condition. The Company maintains allowances for potential credit losses.
FINANCIAL INSTRUMENTS -- The Company's financial instruments include cash
and cash equivalents, short-term investments, notes receivable from stockholders
and long-term debt. At December 31, 2001 and 2000, the fair value of these
financial instruments approximated their financial statement carrying amounts,
because the financial instruments are either short-term or reflect interest
rates consistent with market rates.
SIGNIFICANT ESTIMATES -- The preparation of financial statements in
conformity with accounting principles as generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
CERTAIN RISKS AND UNCERTAINTIES -- The Company operates in the software
industry, and accordingly, can be affected by a variety of factors. For example,
management of the Company believes that changes in any of the following areas
could have a significant negative effect on the Company in terms of its future
financial position, results of operations and cash flows: ability to obtain
additional financing; regulatory changes; fundamental changes in the technology
underlying software products; market acceptance of the Company's products under
development; development of sales channels; loss of significant customers;
adverse changes in international market conditions; litigation or other claims
against the Company; the hiring, training and retention of key employees;
successful and timely completion of product development efforts; and new product
introductions by competitors.
The Company has incurred net losses each year since 1996 including losses of
$15.1 million in 2001, $16.7 million in 2000, and $11.3 million in 1999. As of
December 31, 2001, the Company had an accumulated deficit of $55.9 million. The
Company believes its cash and cash equivalents of $7.4 million are sufficient to
meet its anticipated cash needs for working capital and capital expenditures
through at least December 31, 2002. If cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, we may seek to
raise additional financing or reduce the scope of its planned product
development and marketing efforts.
COMPREHENSIVE (LOSS)/INCOME -- In 2001, the Company's comprehensive loss
included a cumulative translation adjustment of $35,000 and in 2000 the
comprehensive income included an unrealized gain on investments of $10,000 and a
cumulative translation adjustment of $46,000.
F-9
SEGMENTS OF AN ENTERPRISE -- The Company currently operates in one
reportable segment and the chief operating decision maker is the Company's Chief
Executive Officer.
RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement requires companies to record derivatives on the
balance sheet as assets or liabilities measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has adopted SFAS 133 effective January 1, 2001. The
adoption of SFAS 133 had no affect on the financial position, results of
operations or cash flow of the Company.
In June 2001, the FASB issued No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives will not be amortized, but will
rather be tested at least annually for impairment. The Company will adopt SFAS
No. 142 for the fiscal year beginning January 1, 2002. The impact of adopting
this standard is not expected to be material to our financial statements as the
Company does not currently carry any goodwill or intangible assets with
indefinite lives.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale whether
previously held and used or newly acquired, and broadened the presentation of
discontinued operations to include more disposal transactions. SFAS No. 144 will
be effective for fiscal years beginning after December 15, 2001 and the Company
adopted the provisions of SFAS No. 144 as of January 1, 2002 but does not expect
SFAS No. 144 to have a material effect on the Company's financial position or
results of operations.
2. ASSET WRITE-DOWNS AND EMPLOYEE TERMINATION COSTS
During 2001, the Company recorded an impairment charge of $2.0 million relating
to the Company's evaluation of certain purchased intangible assets. These
intangible assets were written down to reflect the carrying value of these
assets to their net realizable values, which reflect the expected economic
benefits to be derived from the use of these assets.
During 2001, the Company adopted a plan to make organizational changes and
reduce its work force. The Company recorded and paid $1.7 million in charges for
employee severance and related operating expenses. This plan involved
terminating 68 domestic employees. There are no accrued and unpaid severance
costs at December 31, 2001.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Equipment............................................ $ 3,189 $ 3,467
Software............................................. 1,093 1,079
Leasehold improvements............................... 177 218
---------- ----------
4,459 4,764
Accumulated depreciation and amortization............ (3,663) (2,987)
---------- ----------
$ 796 $ 1,777
========== ==========
F-10
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
DECEMBER 31,
----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Equipment term loan................................... $ 67 $ 333
Equipment term loan................................... 502 533
Capital lease obligations (see Note 5)................ 44 87
Other long-term obligations........................... 655 1,275
---------- ----------
1,268 2,228
Less current portion.................................. (847) (1,296)
---------- ----------
$ 421 $ 932
========== ==========
In November 2001, the Company renewed its credit facilities with a bank.
Under the renewed facilities, the Company continues to have available a $5
million revolving line of credit facility available through January 31, 2002.
(Refer to Note 12 for amendment.)
As of December 31, 2001, the Company had no borrowings outstanding under its
renewed $5 million line of credit facility. Under this facility, any outstanding
borrowings will bear interest at prime rate of 4.75 % at December 31, 2001, plus
0.5%.
As of December 31, 2001, the Company had $67,000 outstanding under its
$800,000 equipment term loan, which bears interest at 7.75%. The Company is
required to make equal principal payments of $22,222 per month plus interest on
the unpaid balance, payable in monthly installments through March 2002.
As of December 31, 2001, the Company had $502,000 outstanding under its
$655,000 equipment term loan with the bank. The Company is required to make
principal payments of $21,843 per month, plus interest, at the bank's base rate
of 4.75% at December 31, 2001 plus 0.5% per annum, payable in monthly
installments through November 2003.
The bank's renewed credit facilities require the Company, among other
things, to maintain a minimum tangible net worth of $7 million and a minimum
quick ratio (current assets, not including inventory, less current liabilities)
of 2 to 1. As of December 31, 2001, the Company was in compliance with its debt
covenants. Borrowings under the facilities are collateralized by substantially
all of the Company's assets.
Other long-term obligations represent uncollateralized non-interest-bearing
amounts payable for the acquisition of various purchased intangibles that are
generally due within two years.
As of December 31, 2001, annual maturities under the equipment financing
facility, the existing equipment term loan, and the other long-term obligations
are as follows:
FISCAL YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------- --------------
2002................................................ $ 847
2003................................................ 421
---------
Total....................................... $ 1,268
=========
5. LEASE COMMITMENTS
Equipment with a net book value of $37,000 and $73,000 at December 31, 2001
and 2000, respectively, (net of accumulated amortization of $47,000 and $13,000)
has been leased under capital leases.
The Company leases its principal facility under a noncancelable operating
lease expiring on December 31, 2004. Rent expense was approximately $773,000,
$965,000 and $953,000 in 2001, 2000 and 1999, respectively.
F-11
Future minimum payments under the Company's leases at December 31, 2001 are:
CAPITAL OPERATING
LEASES LEASES (A)
------ ----------
(IN THOUSANDS)
2002.............................................. 27 1,022
2003.............................................. 22 926
2004.............................................. -- 798
2005.............................................. -- 61
------- ---------
Total................................... 49 $ 2,807
=========
Amount representing interest...................... (5)
-------
Present value..................................... 44
Current portion................................... (21)
-------
Long-term portion................................. $ 23
=======
- ----------
(a) The operating lease payment schedule above represents future minimum
payments for each of the years presented based on information available as
of February 28, 2002 as a result of the renegotiations of certain operating
leases by the Company (Refer to Note 12 for amendment).
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In February 1999, the Company entered into an agreement with a customer and
Series D preferred stockholder, whereby such customer was to perform development
work to achieve certain performance improvements related to the Company's
PowerTier product. In connection with this agreement, the Company allowed such
customer to purchase 90,300 shares of common stock at $1.65 per share in
February 1999, which was less than the deemed fair value for accounting
purposes. The Company has recorded a research and development expense of
$303,000 in 1999 for the difference between the deemed fair value and the
purchase price of $1.65 per share.
1994 STOCK PURCHASE PLAN
Under the 1994 Stock Purchase Plan (the "Plan"), the Company could sell
common stock to employees of the Company at the fair market value as determined
by the Board of Directors. Sales are to be made pursuant to restricted stock
purchase agreements containing provisions established by the Board of Directors.
No shares were issued under the Plan in 2001, 2000 and 1999. The Company has the
right to repurchase these shares at the original issuance price upon termination
of employment; this right expires ratably over four years. During 2001 the
Company repurchased no shares. During 2000 and 1999, the Company repurchased
5,782 and 10,084 shares, respectively, at prices ranging from $0.06 to $0.23 per
share. At December 31, 2001, no shares were subject to repurchase and no shares
were available for future grant.
1997 STOCK PLAN
As of December 31, 2001, the Company has reserved 6,594,652 shares of common
stock for issuance, at the discretion of the Board of Directors, to officers,
directors, employees and consultants pursuant to its 1997 Stock Plan. This
reserved amount was increased automatically on January 1, 2002 under the
provisions of the Plan by 985,000 shares to 7,579,652 shares reserved. The Plan
also provides for an automatic annual increase on the first day of 2003, 2004
and 2005 equal to the lesser of 985,000 shares, 4.94% of the outstanding common
stock on the last day of the immediately preceding fiscal year, or such lesser
number as determined by the Board of Directors.
At December 31, 2000, 796,487 shares have been issued at $0.23 per share
pursuant to restricted stock purchase agreements in which the Company has a
right to repurchase these shares at the original issuance price upon termination
of employment; this right expires ratably over four years. At December 31, 2001,
no shares were subject to repurchase. During 2001, the Company repurchased
124,584 shares, at a price of $0.23. No shares were repurchased in 2000 and
1999.
F-12
At December 31, 2001 4,931,062 shares are reserved for exercise of issued
and outstanding options, and 1,827,592 shares are available for future grant.
The shares available for future grant automatically increased by 985,000 shares
on January 1, 2002 to 2,812,592 shares.
Options granted under the 1997 Stock Plan generally vest over four years and
expire ten years from the date of grant.
Additional information with respect to options under the 1997 Stock Plan is
as follows:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
------------ ---------
Outstanding, January 1, 1999
(112,258 exercisable at a weighted average exercise price of $0.24)............. 1,214,197 $ 0.47
Granted (weighted average fair value of $4.14).................................. 2,895,287 $ 11.39
Exercised....................................................................... (310,499) $ 0.60
Canceled........................................................................ (555,510) $ 3.69
------------ ---------
Outstanding, December 31, 1999
(279,720 exercisable at a weighted average exercise price of $3.33)............. 3,243,475 $ 9.65
Granted (weighted average fair value of $10.95)................................. 2,631,450 $ 13.48
Exercised....................................................................... (365,734) $ 7.02
Canceled........................................................................ (1,656,439) $ 10.80
------------ ---------
Outstanding, December 31, 2000
(992,433 exercisable at a weighted average exercise price of $9.60)............. 3,852,752 $ 12.02
Granted (weighted average fair value of $1.36).................................. 4,636,844 $ 1.47
Exercised....................................................................... (192,096) $ 0.56
Canceled........................................................................ (5,049,030) $ 9.42
------------ ---------
Outstanding, December 31, 2001
(953,710 exercisable at a weighted average exercise price of $3.17)............. 3,248,470 $ 1.67
============ =========
Additional information regarding options outstanding as of December 31, 2001
is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ---------------------
WEIGHTED AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
------------------ ------------ ---------------- -------------- ----------- ---------
$ 0.01 to $ 0.50 616,635 9.23 $ 0.41 80,766 $ 0.32
$ 0.51 to $ 5.00 2,419,335 9.76 $ 1.17 678,654 $ 1.24
$ 5.01 to $10.00 155,000 8.00 $ 9.40 142,208 $ 9.54
$10.01 to $15.00 29,000 4.49 $13.85 27,562 $ 13.88
$15.01 to $20.00 23,500 5.61 $16.24 21,500 $ 16.32
$20.01 to $20.94 5,000 7.56 $20.94 3,020 $ 20.94
---------- ----- ------- -------- --------
3,248,470 9.49 $ 1.67 953,710 $ 3.17
========= ========
STOCK OPTION REPRICING
On May 9, 2001, the Company offered to exchange all outstanding options
granted under the Company's 1997 Stock Plan that had an exercise price in excess
of $1.00 per share and were held by option holders who were employees of the
Company on the date of tender and through the grant date, for new options to
purchase shares of the Company's common stock. This offer expired on June 7,
2001 and resulted in the cancellation of 2,155,032 unexercised options. Subject
to the terms and conditions of the offer, the Company has granted new options
under the 1997 Stock Plan to purchase shares of common stock in exchange for
such tendered options no earlier than six months and one day after June 7, 2001.
The exercise price per share of the new options is $1.23 which is equal to the
fair market value of the underlying common stock on the date of grant, December
10, 2001, which was determined to be the last reported sale price of the common
stock on the Nasdaq National Market on the grant date.
F-13
1999 DIRECTORS' STOCK OPTION PLAN
The Company's 1999 Directors' Stock Option Plan (the "Directors' Plan")
became effective upon the closing of the Company's initial public offering in
June 1999. Under the Directors' Plan, a total of 500,000 shares of common stock
have been reserved for the grant of nonstatutory stock options to nonemployee
directors of the Company. Options granted under the Director's Plan shall be
immediately vested and expire in five years from the date of grant. No options
were granted under the Director's Plan during 1999. During 2000, options to
purchase 44,000 shares were granted under the Director's Plan at exercise prices
ranging from $9.75 to $22.50 and options to purchase 36,000 were outstanding at
December 31, 2000. During 2001, 60,000 options were granted under the Director's
Plan at exercises prices ranging from $0.45 to $4.47 and 88,000 were outstanding
at December 31, 2001.
1999 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1999 Employee Stock Purchase Plan (the "ESPP") became
effective upon the closing of the Company's initial public offering in June
1999. Under the ESPP, eligible employees may purchase common stock through
payroll deductions, which may not exceed 20% of any employee's compensation, nor
more than 2,500 shares in any one purchase period. A total of 600,000 shares of
common stock has been reserved for issuance under the ESPP. The ESPP allows for
an automatic annual increase on the first day of 2000, 2001, 2002, 2003 and 2004
equal to the lesser of 250,000 shares or 1% of outstanding common stock on the
last day of the immediately preceding fiscal year. During 2001, 90,364 shares
were issued under the ESPP at prices ranging from $0.41 to $3.29 per share
resulting in aggregate proceeds of $178,000. During 2000, 104,077 shares were
issued under the ESPP at prices ranging from $9.35 to $14.56 per share and
aggregate proceeds of $1,037,000. During 1999 no shares were issued under the
ESPP.
DEFERRED STOCK COMPENSATION
In connection with grants of certain stock options and issuance of common
stock in 2001, 2000, and 1999, the Company recorded nil (net of terminations of
$281,000), $85,000 (net of terminations of $283,000), and $45,000 (net of
terminations of $90,000), respectively, for the difference between the estimated
fair value and the stock price as determined by the Board of Directors on the
date of grant/issuance. This amount is being amortized to expense over the
vesting period of the related stock/stock options (generally four years).
Amortization of deferred stock compensation for the years ended December 31,
2001, 2000, and 1999 was $245,000, $416,000, and $971,000 respectively.
ISSUANCE OF STOCK WARRANTS IN EXCHANGE FOR SERVICES
During 2001, the Company issued stock warrants to a nonemployee for
consulting services for the purchase of 80,000 shares of common stock at an
exercise price of $0.57. Such warrants vest over a period of four years. In
accordance with SFAS 123 and its related interpretations, the Company accounted
for this award under the fair market value method and as a variable award.
Accordingly, the Company recorded compensation expense equal to the fair value
of the vested options. The fair value of these awards was calculated using the
Black-Scholes pricing model. The compensation expense recorded in 2001 was
$53,000 and was recognized in the accompanying statement of operations in
accordance with the related service being performed.
STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net loss as if the Company had adopted the fair value
method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions for options outstanding under
the 1997 Stock Plan: expected life, 24 months following vesting; risk free
interest rate, 5.0% in 2001, 5.1% in 2000, and 5.4% in 1999; volatility of 183%
for 2001, 124% for 2000, 50% for 1999 after the Company's June 1999 initial
public offering of common stock and none before that date; and no dividends
during the expected term. The Company's calculations are based on a multiple
option valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the awards granted in 1997 and after had been amortized
F-14
to expense over the vesting period of the awards, pro forma net loss (net of
amortization of deferred compensation expense already recorded for the years
ended December 31, 2001, 2000 and 1999, as discussed above) would have been
approximately $11.1 million ($0.56 per basic and diluted share) in 2001, $27.0
million ($1.40 per basic and diluted share) in 2000 and $13.0 million ($0.99 per
basic and diluted share) in 1999. The pro-forma reduction in net loss for 2001
from the amount reported was due to the cancellation of unvested options that
had higher original exercise prices than the repriced options granted later in
the year. This issue is further discussed in the "stock repricing" section of
this footnote.
7. 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):
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
----------- ----------- -----------
Net loss (numerator), basic and diluted........................ $ (15,132) $ (16,726) $ (11,306)
Shares (denominator):
Weighted average common shares outstanding................... 19,946 19,621 13,605
Weighted average common shares outstanding subject
to repurchase............................................. (27) (291) (514)
----------- ----------- -----------
Shares used in computation, basic and diluted................ 19,919 19,330 13,091
=========== =========== ===========
Net loss per share, basic and diluted.......................... $ (0.76) $ (0.87) $ (0.86)
=========== =========== ===========
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 anti-dilutive. Such outstanding
securities consist of the following:
DECEMBER 31,
--------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Shares of common stock subject to repurchase............... -- 184,167 398,066
Outstanding options........................................ 3,248,470 3,852,752 3,243,475
Warrants................................................... 80,000 -- --
-------------- -------------- --------------
Total............................................ 3,328,470 4,036,919 3,641,541
============== ============== ==============
Weighted average exercise price of options................. $ 3.17 $ 12.02 $ 9.65
============== ============== ==============
Weighted average exercise price of warrants................ $ 0.57 $ -- $ --
============== ============== ==============
8. INCOME TAXES
The Company's deferred income tax assets are comprised of the following at
December 31:
2001 2000
----------- -----------
(IN THOUSANDS)
Net deferred tax assets:
Net operating loss carryforwards............... $ 17,491 $ 12,352
Accruals deductible in different periods....... 179 1,814
General business credits....................... 2,469 1,478
Depreciation and amortization.................. 3,485 1,047
----------- -----------
23,624 16,691
Valuation allowance............................ (23,624) (16,691)
----------- -----------
Total.................................. $ -- $ --
=========== ===========
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards. Due to the uncertainty surrounding the
realization of the benefits of its favorable tax attributes in future tax
returns, as of December 31, 2001 and 2000, the Company has fully reserved its
net deferred tax assets of approximately $23.6 million and $16.7 million,
respectively.
F-15
The Company's effective rate differs from the expected benefit at the
federal statutory tax rate at December 31 as follows:
2001 2000 1999
-------- -------- --------
Federal statutory tax rate.................. (35.0)% (35.0)% (35.0)%
State taxes, net of federal benefit......... (6.0) (6.0) (6.0)
Stock compensation expense.................. -- 1.0 3.4
Other....................................... 0.1 0.4 0.3
Valuation allowance......................... 40.9 39.6 37.3
-------- -------- --------
Effective tax rate.......................... -- % -- % -- %
======== ======== ========
Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.
At December 31, 2001, the Company has net operating loss (NOL) carryforwards
of approximately $48.4 million and $9.5 million for federal and state income tax
purposes, respectively. The federal NOL carryforwards expire through 2020, while
the state NOL carryforwards expire through 2011. The net operating loss
carryforwards available for state tax purposes are substantially less than for
federal tax purposes, primarily because only 50% of state net operating losses
can be utilized to offset future state taxable income and because state net
operating loss carry forwards generated in earlier years have already expired.
At December 31, 2001, the Company also has research and development credit
carryforwards of approximately $1.5 million and $1.4 million available to offset
future federal and state income taxes, respectively. The federal credit
carryforward expires in 2021, while the state credit carryforward has no
expiration.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
9. RELATED PARTY TRANSACTIONS
During 2001 and 2000, other than those items disclosed in Note 10, the
Company had insignificant transactions with related parties. During 1999,
the Company paid $69,000 to a director for consulting services.
See also Note 10 for information about significant revenues from common
stockholders.
10. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company is engaged in the development and marketing of transactional
application server software products and operates in one reportable segment
under SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information."
GEOGRAPHIC INFORMATION
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2001 2000 1999
------------------------ ------------------------- -------------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES(1) ASSETS REVENUES(1) ASSETS REVENUES(1) ASSETS
----------- ------ ----------- ------ ----------- ------
(IN THOUSANDS)
United States............ $ 11,989 $ 740 $ 18,107 $ 1,632 $ 10,369 $1,004
Europe................... 5,505 54 4,755 73 3,338 27
Rest of the world........ 1,877 2 2,415 72 736 20
--------- -------- --------- -------- --------- -------
$ 19,371 $ 796 $ 25,277 $ 1,777 $ 14,443 $1,051
========= ======== ========= ======== ========= =======
- ----------
(1) Revenues are broken out geographically by the ship-to location of the
customer.
SIGNIFICANT CUSTOMERS
During 2001, one customer accounted for 15% of the Company's total revenues
and another customer accounted for 11% of the Company's total revenues. During
2000, one customer accounted for 16% of the Company's total revenues and one
F-16
customer (a common stockholder) accounted for 5% of the Company's total
revenues. During 1999, one customer (a common stockholder) accounted for 13% of
the Company's total revenues.
At December 31, 2001, two customers accounted for 11% of accounts
receivable. At December 31, 2000, one customer accounted for 19% of accounts
receivable, and another customer accounted for 18% of accounts receivable.
11. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute a percentage of their eligible compensation (presently
from 1% to 20% up to the maximum allowed under IRS rules). Company contributions
are discretionary; no such Company contributions have been made since inception
of this plan.
12. SUBSEQUENT EVENTS
The Company renegotiated its lease on principal facility on February 5,
2002. (Refer to Note 5)
On March 18, 2002, the Board of Directors extended the due date made to an
employee on a stock loan to December 31, 2003. (Refer to Note 1.)
On March 20, 2002, the Company renewed its credit facilities with a bank.
Under the renewed facilities, the Company continues to have a revolving line of
credit facility of up to $5 million available through April 30, 2003. The bank's
renewed credit facilities require the Company, among other things, to maintain a
minimum tangible net worth of $7 million and a minimum quick ratio of 2 to 1.
Borrowings under the facility is collateralized by substantially all of the
Company's assets.
F-17
PERSISTENCE SOFTWARE, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
PAGE
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Audited Consolidated Financial Statement Schedule:
Independent Auditors' Report.......................................... S-2
Schedule II-- Consolidated Schedule of Valuation and Qualifying
Accounts for the years ended December 31, 2001, 2000 and 1999....... S-3
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
S-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Persistence Software, Inc.:
We have audited the consolidated financial statements of Persistence
Software, Inc. and subsidiaries (the "Company") as of December 31, 2001 and
2000, and for each of the three years in the period ended December 31, 2001, and
have issued our report thereon dated January 22, 2002, (February 28, 2002 as to
Note 5 and March 20, 2002 as to Note 12). Our audits also included the
consolidated financial statement schedule of the Company listed in the Index at
Item 14(a)(2). This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
January 22, 2002
S-2
SCHEDULE II
PERSISTENCE SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED
$000'S BEGINNING TO COST DEDUCTIONS/ BALANCE AT
OF YEAR AND EXPENSES WRITE-OFFS END OF YEAR
------------ ------------ ------------ ------------
Year ended December 31, 1999 Allowance for
doubtful accounts .............................. $ 47 $ 467 $ 182 $ 332
============ =========== ============ ============
Year ended December 31, 2000 Allowance for
doubtful accounts............................... $ 332 $ 915 $ 19 $ 1,228
============ =========== ============ ============
Year ended December 31, 2001 Allowance for
doubtful accounts............................... $ 1,228 $ 951 $ 2,027 $ 152
============ =========== ============ ============
S-3