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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-25857
================================================================================
PERSISTENCE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3138935
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(Address of principal executive offices, including zip code)
(650) 372-3600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 2002, there were 20,153,087 shares of the registrant's Common
Stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2002 AND
DECEMBER 31, 2001.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 2002 AND 2001.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(UNAUDITED) [1]
ASSETS
Current assets:
Cash and cash equivalents $ 7,318 $ 7,411
Accounts receivable, net 3,594 4,106
Prepaid expenses and other current assets 524 656
----------- -----------
Total current assets 11,436 12,173
Property and equipment, net 520 796
Purchased intangibles, net 425 722
Other assets 72 64
----------- -----------
Total assets $ 12,453 $ 13,755
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 583 $ 1,070
Accrued compensation and related benefits 1,141 892
Other accrued liabilities 935 457
Deferred revenues 3,829 2,124
Current portion of long-term obligations 788 847
----------- -----------
Total current liabilities 7,276 5,390
Long-term obligations, net of current portion 191 421
----------- -----------
Total liabilities 7,467 5,811
----------- -----------
Stockholders' equity:
Preferred stock -- --
Common stock 64,112 64,036
Deferred stock compensation (65) (119)
Notes receivable from stockholders (54) (54)
Accumulated deficit (59,024) (55,930)
Accumulated other comprehensive loss 17 11
----------- -----------
Total stockholders' equity 4,986 7,944
----------- -----------
Total liabilities and stockholders' equity $ 12,453 $ 13,755
=========== ===========
[1] The condensed consolidated balance sheet as of December 31, 2001 has been
extracted from the consolidated financial statements as of that date, and
does not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUN. 30, JUN. 30, JUN. 30, JUN. 30,
2002 2001 2002 2001
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Revenues:
Licenses $ 4,104 $ 2,538 $ 4,937 $ 4,669
Service 1,626 2,213 2,954 4,948
--------- --------- --------- ---------
Total revenues 5,730 4,751 7,891 9,617
--------- --------- --------- ---------
Cost of revenues:
Licenses 75 1 102 6
Service 759 1,189 1,527 2,362
--------- --------- --------- ---------
Total cost of revenues 834 1,190 1,629 2,368
--------- --------- --------- ---------
Gross profit 4,896 3,561 6,262 7,249
--------- --------- --------- ---------
Operating expenses:
Sales and marketing 2,586 3,819 5,020 8,168
Research and development, 1,038 1,583 2,156 3,331
General and administrative 919 1,394 1,846 2,768
Amortization and impairment of purchased intangibles 142 2,458 354 3,177
Restructuring costs -- 688 -- 1,473
--------- --------- --------- ---------
Total operating expenses 4,685 9,942 9,376 18,917
--------- --------- --------- ---------
Income/(Loss) from operations 211 (6,381) (3,114) (11,668)
Interest income 21 115 55 319
Interest and other expense (17) (18) (35) (45)
--------- --------- --------- ---------
Net income/(loss) $ 215 $ (6,285) $ (3,094) $(11,394)
========= ========= ========= =========
Basic net income/(loss) per share $ 0.01 $ (0.32) $ (0.15) $ (0.57)
========= ========= ========= =========
Diluted net income/(loss) per share $ 0.01 $ (0.32) $ (0.15) $ (0.57)
========= ========= ========= =========
Shares used in calculating basic net income/(loss) per
share 20,153 19,916 20,121 19,854
========= ========= ========= =========
Shares used in calculating diluted net
income/(loss) per share 20,486 19,916 20,121 19,854
========= ========= ========= =========
See notes to condensed consolidated financial statements.
4
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30,
2002 2001
--------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,094) $(11,394)
Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities:
Depreciation and amortization 688 1,090
Impairment of purchased intangibles -- 1,988
Amortization of deferred stock compensation 54 162
Loss on sale of fixed assets -- 154
Change in allowance for doubtful accounts 399 160
Changes in operating assets and liabilities:
Accounts receivable 113 1,571
Prepaid expenses and other current assets 132 613
Accounts payable (487) (1,209)
Accrued compensation and related benefits 249 (1,623)
Other accrued liabilities 478 (548)
Deferred revenues 1,705 (969)
--------- ---------
Net cash provided by/(used in) operating activities 237 (10,005)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments -- 2,846
Purchase of property and equipment (48) (36)
Proceeds from sale of property and equipment -- 81
Purchased intangibles additions (45) --
Deposits and other (8) (6)
--------- ---------
Net cash provided by/(used in) investing activities (101) 2,885
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of repurchases 76 270
Repayment of notes receivable from stockholders -- 40
Borrowing under capital lease obligations 12 --
Repayment of capital lease obligations (14) (26)
Repayment of obligations incurred to acquire purchased intangibles (110) (205)
Borrowing under loan agreement -- 122
Repayment under loan agreement (199) (154)
--------- ---------
Net cash provided by/(used in) financing activities (235) 47
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 6 (92)
--------- ---------
CASH AND CASH EQUIVALENTS:
Net decrease (93) (7,165)
Beginning of period 7,411 14,103
--------- ---------
End of period $ 7,318 $ 6,938
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Release of compensatory stock arrangements $ -- $ 252
========= =========
Property and equipment acquired by capital leases $ (22) $ --
========= =========
Compensatory stock arrangements $ -- $ (53)
========= =========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BUSINESS
Persistence Software solves data access problems for distributed and
real-time systems. Persistence solutions help deliver better business visibility
for applications that require current information about customers, products and
suppliers. Persistence is a leading provider of transaction application servers,
data management products, and dynamic Web content acceleration servers --
software that processes transactions between users and back-end computer systems
in electronic commerce systems.
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.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this filing on
Form 10-Q as of June 30, 2002 and for the three and six month periods ended June
30, 2002 and 2001 have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission for interim
financial statements. Certain information and footnote disclosures normally
included in complete financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The December 31,
2001 balance sheet was extracted from audited financial statements as of that
date, but does not include all disclosures required by generally accepted
accounting principles for complete financial statements. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the annual consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K as of and for year
ended December 31, 2001 filed with the Securities and Exchange Commission.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's condensed
consolidated financial position as of June 30, 2002, its condensed consolidated
results of operations for the three and six month periods ended June 30, 2002
and 2001, and its condensed consolidated cash flows for the six month periods
ended June 30, 2002 and 2001, have been made. The results of operations and cash
flows for any interim period are not necessarily indicative of the operating
results and cash flows for any future interim or annual periods.
3. NET INCOME/(LOSS) PER SHARE
Basic net income/(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
income/(loss) per common share was the same as basic net income/(loss) per
common share for all periods presented, except for the three months ended June
30, 2002, since the effect of any potentially dilutive securities is excluded as
they are anti-dilutive because of the Company's net losses. Diluted net income
per common share includes the dilutive affect of certain potentially dilutive
securities, in accordance with FAS128 "Earnings per Share".
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net income/(loss) per share (in thousands, except
per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income/(loss) (numerator), basic and diluted $ 215 $ (6,284) $ (3,094) $(11,394)
========= ========= ========= =========
Shares (denominator):
Weighted average common shares outstanding 20,153 19,946 20,121 19,892
Weighted average common shares outstanding subject
to repurchase 0 (30) (0) (38)
--------- --------- --------- ---------
Shares used in computation, basic earnings per share 20,153 19,916 20,121 19,854
Common Stock equivalents related to
employee stock options and warrants 333 0 0 0
--------- --------- --------- ---------
Shares used in computation, diluted earnings per share 20,486 19,916 20,121 19,854
========= ========= ========= =========
Basic net income/(loss) per share $ 0.01 $ (0.32) $ (0.15) $ (0.57)
========= ========= ========= =========
Diluted net income/(loss) per share $ 0.01 $ (0.32) $ (0.15) $ (0.57)
========= ========= ========= =========
6
The computation of diluted earnings per share for the three months ended
June 30, 2002 excludes outstanding employee stock options to purchase 3,055,000
shares because the effect of these options were antidilutive.
As of June 30, 2002 and 2001, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future. Such
outstanding securities consist of the following (in thousands):
JUNE 30, JUNE 30,
2002 2001
------------ -----------
Shares of common stock subject to repurchase 0 21
Outstanding options 3,388 1,972
Warrants 80 80
------- -------
Total 3,468 2,073
======= =======
4. COMPREHENSIVE INCOME
For all periods presented, the Company had no comprehensive income items
other than net income/(loss) and changes in the cumulative translation
adjustment.
5. 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 was not 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
discounted operations to include more disposal transactions. SFAS No. 144 will
be effective for fiscal years beginning after December 15, 2001. The Company
adopted the provisions of SFAS No. 144 as of January 1, 2002 which did not have
a material effect on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses accounting for restructuring
and similar costs. SFAS 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force Issue No. 94-3. The Company will adopt the provisions
of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS
146 requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost was recognized at the date of the Company's
commitment to an exit plan. SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly, SFAS 146 may
affect the timing of recognizing future restructuring costs as well as the
amounts recognized.
ITEM 2. 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 in our Annual Report on Form
10-K as of and for the year ended December 31, 2001 filed with the Securities
and Exchange Commission. In addition, this Management's Discussion and Analysis
of Financial Condition and Results of Operations and other parts of this Form
10-Q contain forward-looking statements that involve risks and uncertainties.
Words such as "anticipates," "believes," "plans," "expects," "future,"
"intends," "targeting," and similar expressions identify forward-looking
7
statements. These statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or forecasted. Factors that might cause such a
difference 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 Form 10-Q and our Annual Report on Form 10-K as of and for the
year ended December 31, 2001 filed with the Securities and Exchange Commission.
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 that 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 DB2 - 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. Our EDGEXTEND data management infrastructure product for Sun
Microsystems' full Java 2 Platform, Enterprise Edition (J2EE, formerly known as
Enterprise Java Beans or EJB) 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 DIRECTALERT product is a proactive, personalized client
caching and notification solution for zero latency applications which extends
the reach of enterprise systems to small form-factor devices such as mobile
phones, wireless PDAs, and digital set-top boxes. POWERTIER application servers
support both C++ and J2EE standards to enable businesses to deploy sophisticated
C++ or Java applications, which readily scale and accommodate rapidly increasing
numbers of users. 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 Cablevision, FedEx, Instinet, Intershop,
Lucent, Motorola, Nokia and Salomon Smith Barney.
Our revenues, which consist of software license revenues and service
revenues, totaled $7.9 million in the six months ended June 30, 2002, $9.6
million in the six months ended June 30, 2001, $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 and only commenced selling DYNAMAI in 2000 and EDGEXTEND and
DIRECTALERT in 2002, we have a limited operating history in the application
server and data management markets.
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
$1.6 million in the six months ended June 30, 2002, $4.4 million in the six
months ended June 30, 2001, $7.4 million in 2001, $7.2 million in 2000 and $4.1
million in 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 revenue from product
sales to a limited number of customers. Sales of products to our top five
customers accounted for 64% of our total revenues in the six months ended June
30, 2002, 51% of our total revenues in the six months ended June 30, 2001, 45%
of total revenues in 2001, 40% of total revenues in 2000, 35% of total revenues
in 1999, and 55% of total revenues in 1998. 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,
and we will need to continue 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 97-2, "Software Revenue Recognition,"
as amended by Statements of Position 98-4 and 98-9. 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 Bulleting ("SAB") No. 101,
8
"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 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 agreement has been executed, 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 or
additional software products. For sales made through distributors, revenue is
recognized upon shipment. Distributors have no right of return. We recognize
revenues from customer training, support and professional 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 at which 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. We had 81 employees as of December 31, 2001 and 76 as
of June 30, 2002, representing a decrease of 6%. In 2001, we have restructured
operations (including a reduction in staff) and have experienced turnover in
staff, which has resulted in an overall reduction in the number of employees. We
have incurred net losses in each quarter from 1996 until March 2002, and had a
modest profit for the quarter ended June 30, 2002. As of June 30, 2002, we had
an accumulated deficit of $59.0 million. We are currently targeting that sales
and marketing expenses, research and development expenses, and general and
administrative expenses, will be below 2001 spending levels. We are currently
targeting to achieve a modest net profit on a GAAP basis for the third and
fourth quarters of 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 maintain profitability in the future. Our success depends significantly upon
broad market acceptance of our POWERTIER and our recently introduced EDGEXTEND
products. 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.
RESULTS OF OPERATIONS
THREE MONTHS (SECOND QUARTERS) ENDED JUNE 30, 2002 AND 2001
Revenues
Our total revenues were $5.7 million for the three months ended June 30,
2002 and $4.8 million for the three months ended June 30, 2001 representing an
increase of 21%. International revenues were $826,000 for the three months ended
June 30, 2002 and $2.4 million for the three months ended June 30, 2001,
representing a decrease of 65%. The decrease was primarily due to a slowdown in
both the European and Asian markets. For the three months ended June 30, 2002,
Cablevision and Salomon Smith Barney accounted for 43% and 21% of total
revenues, respectively. For the three months ended June 30, 2002, sales of
products and services to our top five customers accounted for 75% of total
revenues. For the three months ended June 30, 2001, sales of products and
services to our top five customers accounted for 63% of total revenues.
License Revenues. License revenues consist of licenses of our software
products, which generally are priced based on the number of users or servers.
License revenues were $4.1 million for the three months ended June 30, 2002 and
$2.5 million for the three months ended June 30, 2001, representing an increase
of 62%. License revenues represented 72% of total revenues for the three months
ended June 30, 2002 and 53% of total revenues for the three months ended June
30, 2001. The increase in software license revenues was primarily due to the
recognition of license revenue for a major contract negotiated and signed in the
first quarter of 2002.
9
Service Revenues. Service revenues consist of professional services
consulting, customer support and training. Our service revenues were $1.6
million for the three months ended June 30, 2002 and $2.2 million for the three
months ended June 30, 2001, representing a decrease of 27%. The decrease in
service revenues was primarily due to several key consulting service contracts
undertaken in 2001 that were not extended into 2002. Service revenues
represented 28% of total revenues for the three months ended June 30, 2002 and
47% of total revenues for the three months ended June 30, 2001.
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 $75,000 for the three months ended June 30, 2002 and $1,000 for the
three months ended June 30, 2001. As a percentage of license revenues, cost of
license revenues were 2% for the three months ended June 30, 2002 and 0% for the
three months ended June 30, 2001. This increase was largely due to increased
royalty charges for technology licensed from a major vendor.
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 $759,000 for
the three months ended June 30, 2002 and $1.2 million for the three months ended
June 30, 2001, representing a decrease of 36%. This decrease was primarily due
to a significant reduction in our use of external consultants in 2002. As a
percentage of service revenues, cost of service revenues were 47% for the three
months ended June 30, 2002 and 54% for the three months ended June 30, 2001.
Cost of service revenues, as a percentage of service revenues may vary between
periods due to our use of third party professional services.
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 marketing and promotional expenses. Our sales and
marketing expenses were $2.6 million for the three months ended June 30, 2002
and $3.8 million for the three months ended June 30, 2001, representing a
decrease of 32%. This decrease was primarily due to a reduction in staffing,
marketing programs, personnel related costs, lower commissions and office space.
Sales and marketing expenses represented 45% of total revenues for the three
months ended June 30, 2002 and 80% of total revenues for the three months ended
June 30, 2001. We are presently targeting that 2002 sales and marketing expense
levels will be below 2001 expense levels.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to external software consultants. Our
research and development expenses were $1.0 million for the three months ended
June 30, 2002 and $1.6 million for the three months ended June 30, 2001,
representing a decrease of 34%. This decrease was primarily due to a reduction
in both employees and external contract staff. Research and development expenses
represented 18% of total revenues for the three months ended June 30, 2002 and
33% of total revenues for the three months ended June 30, 2001. We are presently
targeting that 2002 research and development expense levels will be below 2001
expense levels.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance, general and
administrative personnel as well as legal costs, bad debt write-offs and various
costs associated with our status as a public company. Our general and
administrative expenses were $919,000 for the three months ended June 30, 2002
and $1.4 million for the three months ended June 30, 2001, representing a
decrease of 34%. This decrease was primarily due to a reduction in personnel
related costs and the termination of patent litigation and related legal fees
and settlements. General and administrative expenses represented 16% of total
revenues for the three months ended June 30, 2002 and 29% of total revenues for
the three months ended June 30, 2001. We are presently targeting that 2002
general and administrative expense levels will be below 2001 expense levels.
Amortization of Purchased Intangibles. Amortization of purchased
intangibles was $142,000 for the three months ended June 30, 2002 and $2.5
million for the three months ended June 30, 2001, representing a decrease of
94%. Based on an evaluation of our purchased intangibles at June 30, 2001, we
recorded an impairment charge of $2.0 million to write down the carrying value
of these assets to their net realizable values, which reflected the expected
economic benefits to be derived from the use of these assets.
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 equipment related borrowings, and various miscellaneous
state and foreign taxes and other expenses. Interest and other income (expense)
was $4,000 for the three months ended June 30, 2002 and $97,000 for the three
months ended June 30, 2001, representing a decrease of 96%. This decrease was
primarily due to a reduction in our overall cash balances and a reduction in
market interest rates. We expect that interest and other income (expense) will
decrease as we continue to use the net proceeds from our initial public offering
and may become a net expense for the remainder of 2002.
10
Stock-Based Compensation. Certain options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value
for accounting purposes was greater than the stock price as determined by the
Board of Directors on the date of grant or issuance. Total deferred stock
compensation associated with equity transactions as of June 30, 2002 was
$65,000, 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 $20,000 in the three months ended
June 30, 2002 and $60,000 in the three months ended June 30, 2001.
Provision for Income Taxes. Since inception, we have incurred net operating
losses for federal and state tax purposes and have only recognized minimal tax
provisions within our international subsidiaries. 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.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Revenues
Our total revenues were $7.9 million for the six months ended June 30, 2002
and $9.6 million for the six months ended June 30, 2001 representing a decrease
of 18%. International revenues were $1.6 million for the six months ended June
30, 2002 and $4.4 million for the six months ended June 30, 2001, representing a
decrease of 64%. The decrease was primarily due to a slowdown in both the
European and Asian markets. In the six months ended June 30, 2002, sales to
Cablevision accounted for 33% of total revenues and sales to Salomon Smith
Barney accounted for 19% of total revenues. For the six months ended June 30,
2001, sales to Salomon Smith Barney accounted for 18% of total revenues and
sales to Intershop accounted for 9% of total revenues.
License Revenues. License revenues consist of licenses of our software
products, which generally are priced based on the number of users or servers.
License revenues were $4.9 million for the six months ended June 30, 2002 and
$4.7 million for the six months ended June 30, 2001, representing an increase of
6%. License revenues represented 63% of total revenues for the six months ended
June 30, 2002 and 49% of total revenues for the six months ended June 30, 2001.
Service Revenues. Service revenues consist of professional services
consulting, customer support and training. Our service revenues were $3.0
million for the six months ended June 30, 2002 and $4.9 million for the six
months ended June 30, 2001, representing a decrease of 40%. The decrease in
service revenues was primarily due to several large consulting service contracts
undertaken in 2001 that were not extended into 2002. Service revenues
represented 37 % of total revenues for the six months ended June 30, 2002 and
51% of total revenues for the six months ended June 30, 2001.
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 $102,000 for the six months ended June 30, 2002 and $6,000 for the
six months ended June 30, 2001. As a percentage of license revenues, cost of
license revenues was 2% for the six months ended June 30, 2002 and 0.1% for the
six months ended June 30, 2001. This increase was largely due to increased
royalty charges.
Cost of Service Revenues. Cost of service revenues consists of personnel and
other costs related to professional services, technical support and training.
Our cost of service revenues was $1.5 million for the six months ended June 30,
2002 and $2.4 million for the six months ended June 30, 2001, representing a
decrease of 35%. This decrease was primarily due to a significant reduction in
our use of third party consultants in 2002. As a percentage of service revenues,
cost of service revenues were 52% for the six months ended June 30, 2002 and 48%
for the six months ended June 30, 2001.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses were $5.0 million for the six months ended June 30, 2002 and $8.2
million for the six months ended June 30, 2001, representing a decrease of 39%.
This decrease was primarily due to a reduction in staffing, marketing programs,
personnel related costs and lower commissions. Sales and marketing expenses
represented 64% of total revenues for the six months ended June 30, 2002 and 85%
of total revenues for the six months ended June 30, 2001. We are presently
targeting sales and marketing expense levels to be below comparable 2001 expense
levels.
11
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to outside software developers. Our
research and development expenses were $2.2 million for the six months ended
June 30, 2002 and $3.3 million for the six months ended June 30, 2001,
representing a decrease of 35%. This decrease was primarily due to a reduction
in both employees and external contract staff. Research and development expenses
represented 27% of total revenues for the six months ended June 30, 2002 and 35%
of total revenues for the six months ended June 30, 2001. We are presently
targeting research and development expense levels to be below comparable 2001
expense levels.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and general management personnel as well as legal costs, bad debt
write-offs and various costs associated with our status as a public company. Our
general and administrative expenses were $1.8 million for the six months ended
June 30, 2002 and $2.8 million for the six months ended June 30, 2001,
representing a decrease of 33%. This decrease was primarily due to a reduction
in staffing and a termination of patent litigation and the related legal fees
and settlements. General and administrative expenses represented 23% of total
revenues for the six months ended June 30, 2002 and 29% of total revenues for
the six months ended June 30, 2001. We are presently targeting general and
administrative expense levels to be below comparable 2001 expense levels.
Amortization and Impairment of Purchased Intangibles. Amortization of
purchased intangibles was $354,000 for the six months ended June 30, 2002 and
amortization and impairment of purchased intangibles was $3.2 million for the
six months ended June 30, 2001.
Interest and Other Income/(Expense). Interest and other income/(expense)
consists primarily of earnings on our cash, cash equivalent and short-term
investment balances, offset by interest expense related to obligations under
capital leases and other borrowings. Net interest income was $20,000 for the six
months ended June 30, 2002 and $274,000 for the six months ended June 30, 2001,
representing a decrease of 93%. This decrease was primarily due to a reduction
in our overall cash balances and a reduction in market interest rates. We expect
that interest and other income (expense) will decrease as we continue to use the
net proceeds from our initial public offering and may become a net expense for
the remainder of 2002.
Stock-Based Compensation. Certain options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value
for accounting purposes was greater than the stock price as determined by the
Board of Directors on the date of grant or issuance. Total deferred stock
compensation associated with equity transactions as of June 30, 2002 was
$65,000, 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 $54,000 in the six months ended
June 30, 2002 and $162,000 in the six months ended June 30, 2001.
Provision for Income Tax. Since inception, we have incurred net operating
losses for federal and state tax purposes and have only recognized minimal tax
provisions within our international subsidiaries. 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.
QUARTERLY RESULTS OF OPERATIONS
Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate 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;
12
o shifts in demand for and market acceptance among our various products,
including POWERTIER and our newest products, EDGEXTEND, DIRECTALERT and
DYNAMAI;
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 or prospective
customers;
o the level of product and price competition in the application server and
data management markets;
o our lengthy sales cycle;
o our success in maintaining our direct sales force and expanding our
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.
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.
Our license revenues in the first quarter of 2002 were lower than those in
the fourth quarter of 2001. In the future, we expect this trend to continue,
with the fourth quarter of each year accounting for the greatest percentage of
total revenues for the year and with an absolute decline in revenues from the
fourth quarter to the first quarter of the next year.
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 amounts of
$800,000 and $655,000 and various capitalized leases. As of June 30, 2002, we
had $7.3 million of cash and cash equivalents and $4.2 million of working
capital.
Net cash provided by operating activities was $237,000 for the six months
ended June 30, 2002 and net cash used in operating activities was $10.0 million
for the six months ended June 30, 2001. For the six months ended June 30, 2002,
cash provided by operating activities was attributable primarily to increases in
deferred revenues and other accrued liabilities and depreciation and
amortization, offset by net losses and a decrease in accounts payable. For the
six months ended June 30, 2001, cash used in operating activities was
attributable primarily to net operating losses and decreases in accounts payable
and accrued compensation. Those uses were partially offset by depreciation and
amortization, a write-down of purchased intangibles for impairment and a
decrease in accounts receivable.
Net cash used in investing activities was $123,000 for the six months ended
June 30, 2002 and net cash provided by investing activities was $2.9 million for
the six months ended June 30, 2001. For the six months ended June 30, 2002, net
cash used in investing activities was attributable primarily to the purchase of
fixed assets and intangibles. For the six months ended June 30, 2001, cash was
provided by investing activities through the conversion of short-term
investments into cash and cash equivalents and by the sale of surplus property
and equipment.
13
Net cash used in financing activities was $213,000 for the six months ended
June 30, 2002 primarily as a result of loan repayments partially offset by sales
of common stock as a result of option exercises. Net cash provided by financing
activities was $47,000 for the six months ended June 30, 2001.
We have credit facilities with Comerica Bank. Under these credit facilities,
the Company has a $5.0 million revolving line of credit facility available
through April 30, 2003, and an equipment term loan of $655,000. As of June 30,
2002 we had no borrowings outstanding under the revolving line of credit
facility. As of June 30, 2002 we had $371,000 outstanding under the 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 $4 million for the quarter
ending June 30, 2002, $4.5 million for the quarter ending September 30, 2002 and
$5 million thereafter, and a minimum quick ratio (current assets not including
inventory less current liabilities excluding deferred revenue) of 2 to 1. As of
June 30, 2002, we were in compliance with our debt covenants. Borrowings under
the facilities are collateralized by substantially all of the Company's assets.
Currently we have no material commitments for capital expenditures nor do we
anticipate a material increase in capital expenditures and lease commitments.
If we meet our targets with respect to revenues and accounts receivable
collections, we are currently targeting 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 June 30, 2003.
If we experience difficulties in achieving our revenue targets, our cash and
cash equivalents may not be sufficient to meet our anticipated cash needs.
Accordingly, our operating plans could be restricted and our business could be
harmed. 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
priveleges 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, our business could be harmed.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the other
information contained in this quarterly report 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 AND DATA
MANAGEMENT MARKETS.
Because we only commenced selling application servers in 1997 and only
commenced selling DYNAMAI in 2000 and EDGEXTEND and DIRECTALERT in 2002, we have
a limited operating history in the application server and data management
markets. 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 dependence for revenue from our POWERTIER for C++ product, which was
first introduced in 1997 and has achieved only limited market
acceptance;
o our dependence for revenue from our POWERTIER for J2EE product, which
was first introduced in 1998 and has achieved only limited market
acceptance;
o our need to achieve market acceptance for our new product introductions,
including DYNAMAI, DIRECTALERT and EDGEXTEND;
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 If we meet our targets with respect to revenues and accounts
receivable collections, we are currently targeting 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 June 30, 2003. 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, our business could be harmed.
14
o our unproven ability to compete in a highly competitive market;
o uncertainty as to the growth rate and spending levels in the software
infrastructure market;
o our dependence on the Java programming language, commonly known as 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 NOT REMAIN
PROFITABLE.
We may not achieve our targeted revenues, and we may not be able to maintain
profitability in the future. We have incurred net losses each year since 1996.
In particular, we incurred losses of $3.1 million in the six months ended June
30, 2002, $11.4 million in 2001, $16.7 million in 200 and, $11.3 million in
1999. As of June 30, 2002, we had an accumulated deficit of $59.0 million. While
we are currently targeting lower sales and marketing, research and development,
and general and administrative expenses for 2002, as compared to 2001, we will
still need to achieve our revenue targets for future growth. Because our product
market is 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.
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 expect to have negative cash flow from operations for the year
ended December 31, 2002.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE.
Based upon our current forecasts and estimates, including revenues and
accounts receivable collections, we are targeting that our current cash and cash
equivalents will be sufficient to meet our anticipated cash needs through at
least June 30, 2003. 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.
15
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 shifts in demand for and market acceptance among our various products,
including POWERTIER and our newer products, EDGEXTEND, DIRECTALERT, and
DYNAMAI;
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 or prospective
customers;
o the level of product and price competition in the application server and
data management 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. Also, we tend to
experience slower sales patterns in Europe in the third quarter. 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.
16
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
product sales to a limited number of customers. In the six months ended June 30,
2002, sales of products and services to our top five customers accounted for 64%
of total revenue with Cablevision and Salomon Smith Barney accounting for 33%
and 19% of total revenues respectively. In the six months ended June 30, 2001,
sales of products and services to our top five customers accounted for 51% of
total revenues with Salomon Smith Barney and Intershop accounted for 18% and 9%
of total revenues respectively. In the year ended December 31, 2001, sales of
products and services 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. In the year ended
December 31, 2000, sales of products and services to Salomon Smith Barney
accounted for 16% of total revenues and sales to our top five customers
accounted for 40% of total revenues. In the year ended December 31, 1999, sales
of products and services to Cisco accounted for 13% of our total revenues, and
sales of products and services to our top five customers accounted for 35% 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
product 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 selling products to industry leaders,
any loss of a customer could harm our reputation within the industry and make it
harder for us to sell our products 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.
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 and EDGEXTEND products, which are 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 over our current targeted spending levels 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 may 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 for WebSphere product was released in March 2002 and our
EDGEXTEND for WebLogic product was released in August 2002. Any delays in
releasing future enhancements to these products or new products on a generally
available basis may materially effect our future revenues.
17
WE ARE CURRENTLY TARGETING THAT A MATERIAL 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 soon
represent a material 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 we are focusing our marketing and sales efforts on our newer
EDGEXTEND data management product, any failure in market adoption of this
product could affect our business.
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO MAINTAIN AND TRAIN 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
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 targeted revenue growth 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, data
management products 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 J2EE APPLICATION
SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR
THEIR 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 if we decide 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.
18
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,
..NET, 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.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE
HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The markets for our products are 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 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 in
the application server markets 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, many 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, potential customers may build their own custom
application servers, so we effectively compete against our potential customers'
internal information technology departments. The majority of our revenue in Q2
2002 came from sales of our POWERTIER products. We are targeting that future
revenues will contain less revenue from our POWERTIER products and more from our
EDGEXTEND and DIRECTALERT products.
19
In the DIRECTALERT market, alternative approaches are provided by a variety
of sources, including the potential for internal development. Company vendors
such as SpiritSoft, TIBCO, and IBM provide message-oriented middleware software
which may evolve into competitive products. Vendors such as webMethods and
Business Objects provide alternative architectures for business intelligence
information. DIRECTALERT is based on licensed technology. If we are unable to
take advantage of this technology, we may be unable to improve the product
quickly enough to react to changing market conditions.
In the EDGEXTEND market, similar technology is available from a variety of
sources. Companies such as Versant, webGain and Excelon are middleware vendors
that offer alternative data management solutions that directly target
EDGEXTEND's market. In addition, many prospective customers may build their own
custom solutions.
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.
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
restructurings in 2001. 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.
20
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.
Our future success will depend, in part, on our successful development of
international markets for our products. Approximately 21% of our revenues came
from sales of products and services outside of the United States for the six
months ended June 30, 2002, and approximately 46% of our revenues came from
sales of products and services outside of the United States for the six months
ended June 30, 2001. Approximately 38% of our revenues came from sales of
products and services outside of the United States during the year ended
December 31, 2001, and approximately 28% of our revenues came from sales of
products and services outside of the United States during the year ended
December 31, 2000. We expect international revenues to continue to represent a
significant portion of our total revenues although we have recently experienced
a slowdown in both the European and Asian markets. 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 our 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, terrorism 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.
21
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. Litigation may be necessary to
enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
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 June 30,
2002, we had approximately 20,153,087 shares of common stock outstanding.
Virtually all of our shares, other than shares held by affiliates, are freely
tradeable. In addition, shares held by affiliates are tradeable, subject to the
volume and other restrictions of Rule 144.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, AND WE HAVE RECEIVED
A NOTICE FROM NASDAQ REGARDING THE POSSIBLE DELISTING OF OUR STOCK FROM THE
NASDAQ NATIONAL MARKET SYSTEM.
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 selling shares of our common stock at a desirable price, or at all.
Furthermore, we have received a notice of potential delisting from the Nasdaq
Stock Market as our stock has traded below $1.00 per share minimum requirement
for a 30 day period. We have until September 3, 2002 to regain compliancy.
Compliance will be achieved if our stock trades above $1.00 per share for ten
consecutive days. If we cannot achieve compliance we expect to receive a formal
delisting notice from Nasdaq Stock Market. We currently intend to seek a Nasdaq
hearing for appeal if and when we receive such notice of delisting. The
maintenance of our Nasdaq National Market System listing is very important to
us. We intend to take appropriate actions, as necessary, including seeking
shareholder approval for a reverse stock split in order to maintain our Nasdaq
National Market System listing. If our efforts in this regard are unsuccessful,
we currently intend to seek a listing on the Nasdaq SmallCap Market, which is
generally considered to be not as broad and efficient a market as the Nasdaq
National Market. This lack of liquidity and visibility could further decrease
the price of our common stock. In addition, delisting from the Nasdaq National
Market could negatively impact our reputation and consequently our business.
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;
22
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.
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
23
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;
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Sensitivity. Our operating results are sensitive to changes in
the general level of U.S. interest rates, particularly because our cash
equivalents are invested in short-term investment accounts. If market interest
rates had changed by approximately ten percent in the six months ending June 30,
2002, our financial results would have changed by approximately $4,000.
Foreign Currency Fluctuations. We operate in several international locations
using local currencies for the payment of employees and suppliers, however, we
did not have any significant net balances that are due or payable in foreign
currencies at June 30, 2002. A hypothetical ten percent change in foreign
currency rates would have changed the results of operations by approximately
$6,000 for the six months ended June 30, 2002. We do not hedge any of our
foreign currency exposures.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not currently subject to any material legal proceedings,
though it may from time to time become a party to various legal proceedings that
arise in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) Use of Proceeds
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 June 30, 2002, we have used the net offering proceeds as follows:
Working capital expenditures....................... $ 20.4 million
Acquiring property and equipment................... 2.4 million
2.9 million
Acquiring technologies............................. --------------
25.7 million
Repayment of equipment related loans............... 1.1 million
Cash and cash equivalents.......................... 7.3 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 stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 6, 2002, we held our annual meeting of stockholders for the year
ended December 31, 2001. The following summarizes the matters submitted to a
vote of the stockholders:
1. The election of one (1) Class III director to serve until the Annual Meeting
of the stockholders for the year ending December 31, 2004:
BROKER
NON-
NOMINEE IN FAVOR OPPOSED ABSTAIN VOTES
------- -------- ------- ------- --------
Christopher Keene 17,355,798 0 61,175 0
25
2. To ratify the appointment of Deloitte & Touche LLP as the independent
auditors of the Company for the fiscal year ending December 31, 2002.
BROKER
NON-
IN FAVOR OPPOSED ABSTAIN VOTES
-------- ------- ------- -----
17,331,306 79,842 5,825 0
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
3.2 By-laws of Persistence Software as amended as of April 18, 2002.
99.1 CEO Certification, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) REPORTS ON FORM 8-K:
None.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ Christine Russell
-------------------------
CHRISTINE RUSSELL
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: August 14, 2002
27
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
3.2 By-laws of Persistence Software as amended as of April 18, 2002.
99.1 CEO Certification, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
28