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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 SEPTEMBER 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 October 31, 2002, there were 20,231,266 shares of the registrant's
Common Stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30,
2002 AND DECEMBER 31, 2001. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. 7
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. 24
ITEM 4. CONTROLS AND PROCEDURES. 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 25
ITEM 5. OTHER INFORMATION. 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 26
SIGNATURES 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
AS OF
-----------------------
SEP. 30, DEC. 31,
2002 2001
--------- ---------
Assets:
Current assets:
Cash and cash equivalents $ 6,809 $ 7,411
Accounts receivable, net 2,516 4,106
Prepaid expenses and other current assets 530 656
--------- ---------
Total current assets 9,855 12,173
Property and equipment, net 484 796
Purchased intangibles, net 412 722
Other assets 66 64
--------- ---------
Total assets $ 10,817 $ 13,755
========= =========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 567 $ 1,070
Accrued compensation and related benefits 911 892
Other accrued liabilities 820 457
Deferred revenues, current portion 2,534 2,124
Current portion of long-term obligations 799 847
--------- ---------
Total current liabilities 5,631 5,390
Long-term liabilities:
Long-term obligations 151 421
Long-term portion of deferred revenues 396 --
--------- ---------
Total long-term liabilities 547 421
--------- ---------
Total liabilities 6,178 5,811
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 64,145 64,036
Deferred stock compensation (42) (119)
Notes receivable from stockholders -- (54)
Accumulated deficit (59,473) (55,930)
Accumulated other comprehensive loss 9 11
--------- ---------
Total stockholders' equity 4,639 7,944
--------- ---------
Total liabilities and stockholders' equity $ 10,817 $ 13,755
========= =========
See notes to condensed consolidated financial statements.
3
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
2002 2001 2002 2001
---------- ---------- ----------- ----------
Revenues:
Licenses $ 2,825 $ 3,114 $ 7,762 $ 7,783
Service 1,319 2,056 4,273 7,004
---------- ---------- ---------- ----------
Total revenues 4,144 5,170 12,035 14,787
---------- ---------- ---------- ----------
Cost of revenues:
Licenses 75 1 177 7
Service 691 975 2,218 3,337
---------- ---------- ---------- ----------
Total cost of revenues 766 976 2,395 3,344
---------- ---------- ---------- ----------
Gross profit 3,378 4,194 9,640 11,443
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 1,848 3,739 6,868 11,906
Research and development, excluding amortization of
purchased intangibles 1,040 1,229 3,196 4,560
General and administrative 798 1,464 2,644 4,232
Amortization and impairment of purchased intangibles 126 245 480 3,422
Restructuring costs -- 200 -- 1,673
---------- ---------- ---------- ----------
Total operating expenses 3,812 6,877 13,188 25,793
Loss from operations (434) (2,683) (3,548) (14,350)
Interest income 20 55 75 374
Interest and other expense (35) (41) (70) (86)
---------- ---------- ---------- ----------
Net loss $ (449) $ (2,669) $ (3,543) $ (14,062)
========== ========== ========== ==========
Basic and diluted net loss per share $ (0.02) $ (0.13) $ (0.18) $ (0.71)
========== ========== ========== ==========
Shares used in calculating basic and diluted net loss per
Share 20,201 19,971 20,148 19,893
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
4
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-------------------------------
SEP. 30, 2002 SEP. 30, 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,543) $ (14,062)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 935 1,895
Impairment of purchased intangibles -- 1,988
Amortization of deferred stock compensation 77 208
Loss on sale of fixed assets -- 154
Change in allowance for doubtful accounts 500 (921)
Changes in operating assets and liabilities:
Accounts receivable 1,090 2,948
Prepaid expenses and other currents assets 125 (144)
Accounts payable (503) (654)
Accrued compensation and related benefits 20 (1,684)
Other accrued liabilities 362 (298)
Deferred revenues 806 (270)
----------- ----------
Net cash used in operating activities (131) (10,840)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments -- 5,387
Purchase of property and equipment (122) (83)
Proceeds from sale of property and equipment -- 81
Acquisition of purchased intangibles (158) --
Increase in other assets -- 36
----------- ----------
Net cash provided by/(used in) investing activities (280) 5,419
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of repurchases 109 249
Collection of notes receivable from stockholders 54 40
Repayment of capital lease obligations (23) (35)
Repayment of obligations incurred to acquire purchased intangibles (215) (415)
Borrowing under loan agreement 149 122
Repayment under loan agreement (263) (286)
----------- ----------
Net cash used in financing activities (189) (325)
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (2) (19)
----------- ----------
CASH AND CASH EQUIVALENTS:
Net decrease (602) (5,766)
Beginning of period 7,411 14,103
----------- ----------
End of period $ 6,809 $ 8,337
=========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired by capital leases $ 34 $ --
=========== ==========
Purchased intangibles acquired under long-term obligations $ -- $ (150)
=========== ==========
Release of compensatory stock arrangements $ -- $ 278
=========== ==========
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 provider of data services software for distributed
data access and management, providing our customers, including Global 2000
corporations, with the data management infrastructure that cost-effectively
delivers vital information to professionals throughout the enterprise so actions
can be taken to streamline business processes.
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 more efficiently, 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 September 30, 2002 and for the three and nine month periods
ended September 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 generally accepted accounting principles 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 and for the year
ended 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 September 30, 2002, its condensed
consolidated results of operations for the three and nine month periods ended
September 30, 2002 and 2001, and its cash flows for the nine month periods ended
September 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 LOSS PER SHARE
Basic net loss per common share excludes dilution and is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period (excluding shares subject to repurchase). Diluted net loss per
common share was the same as basic net loss per common share for all periods
presented. The effect of any potentially dilutive securities is excluded as they
are anti-dilutive in relation to the Company's net losses.
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands, except per share
amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEP. 30, SEP. 30,
---------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ----------- ----------
Net loss (numerator), basic and diluted $ (449) $ (2,669) $ (3,543) $ (14,062)
========== ========== =========== ==========
Shares (denominator):
Weighted average common shares outstanding 20,201 19,985 20,148 19,923
Weighted average common shares outstanding subject
to repurchase
-- (14) -- (30)
---------- ---------- ----------- ----------
Shares used in computation, basic and diluted 20,201 19,971 20,148 19,893
========== ========== =========== ==========
Net loss per share, basic and diluted $ (0.02) $ (0.13) $ (0.18) $ (0.71)
========== ========== =========== ==========
6
As of September 30, 2002 and 2001, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been anti-dilutive. Such outstanding
securities consist of the following (in thousands):
SEP. 30, SEP. 30,
2002 2001
-------- --------
Shares of common stock subject to repurchase -- 5
Outstanding options 3,936 1,436
Outstanding warrants 80 80
-------- --------
Total 4,016 1,521
-------- --------
4. COMPREHENSIVE INCOME
The components of comprehensive loss, consisting of the Company's reported
net loss and unrealized gains or losses in the translation of foreign
currencies, are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEP. 30, SEP. 30,
---------------------------- -----------------------------
2002 2001 2002 2001
---------- ----------- ----------- ----------
Net loss $ (449) $ (2,669) $ (3,543) $ (14,062)
Other comprehensive income (loss) (8) 73 (2) (19)
---------- ----------- ----------- ----------
Total comprehensive loss $ (457) $ (2,596) $ (3,545) $ (14,081)
========== =========== =========== ==========
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 broadens the presentation of
discounted operations to include more disposal transactions. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company
adopted the provisions of SFAS No. 144 as of January 1, 2002. The impact of
adopting SFAS No. 144 did not have a material effect on the Company's financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity" (Issue 94-3). The Company will adopt the
provisions of SFAS No. 146 for restructuring activities initiated after December
31, 2002. SFAS No. 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 No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the Company's 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
7
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
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's 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 more efficiently, 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. Our 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. Major customers include Applied Biosystems, Cablevision, Eurocontrol,
Fiducia AG, Intershop, i2, Lucent, Motorola, Nokia, Reuters Financial Software
and Salomon Smith Barney.
Our revenues, which consist of software license revenues and service
revenues, totaled $12.0 million in the nine months ended September 30, 2002, and
$14.8 million in the nine months ended September 30, 2001. Revenues for 2001
totaled $19.4 million, 2000 totaled $25.3 million, and 1999 totaled $14.4
million. 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 applications servers in 1997 and only
commenced selling DYNAMAI in 2000 and EDGEXTEND and DIRECT ALERT in 2002, we
have a limited operating history in the application server and data management
markets. We currently expect that sales of our older POWERTIER products will
continue to contribute significantly to our revenues, but that sales of our
newer EDGEXTEND and DIRECTALERT products will contribute a growing percentage of
our revenues over the next several quarters.
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
$3.7 million in the nine months ended September 30, 2002, and $5.6 million in
the nine months ended September 30, 2001. Revenues from outside the United
States totaled $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 our revenues from
sales to a limited number of customers. Sales of products to our top five
customers accounted for 62% of revenues in the nine months ended September 30,
2002, 49% of our total revenues in the nine months ended September 30, 2001, 40%
of total revenues in 2000, and 35% of total revenues in 1999. In addition, the
identity of our top five customers has changed from year to year. In the future,
it is likely that a relatively few large customers could continue to account for
a relatively large proportion of our revenues.
8
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,
"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.
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 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 71 as of September 30,
2002, representing a decrease of 12%. In 2001, we restructured operations
(including a reduction in staff) and experienced turnover in staff, which
resulted in an overall reduction in the number of employees. We have incurred
net losses in each quarter from 1996 until March 2002, we had a modest profit
for the quarter ended June 30, 2002 and we incurred a net loss for the quarter
ended September 30, 2002. As of September 30, 2002, we had an accumulated
deficit of $59.5 million. We are currently targeting that sales and marketing
expenses, research and development expenses, and general and administrative
expenses for 2002 will be below 2001 spending levels.
We believe that period-to-period comparisons of our operating results are
not meaningful and should not be relied upon as indicative of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets. We may
not achieve profitability in the future. Our success depends significantly upon
broad market acceptance of our recently introduced EDGEXTEND and DIRECTALERT
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 data services and data integration.
RESULTS OF OPERATIONS
THREE MONTHS (THIRD QUARTERS) ENDED SEPTEMBER 30, 2002 AND 2001
Revenues
Our total revenues were $4.1 million for the three months ended September
30, 2002 and $5.2 million for the three months ended September 30, 2001
representing a decrease of 20%. International revenues were $2.1 million for the
three months ended September 30, 2002 and $1.2 million for the three months
ended September 30, 2001, representing an increase of 75%. For the three months
ended September 30, 2002, Fiducia AG and Cablevision accounted for 28% and 22%
of total revenues, respectively. For the three months ended September 30, 2002,
sales of products and services to our top five customers accounted for 73% of
total revenues. For the three months ended September 30, 2001, sales of products
and services to our top five customers accounted for 66% 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 $2.8 million for the three months ended September 30, 2002
and $3.1 million for the three months ended September 30, 2001, representing a
9
decrease of 9%. The decrease in software license revenues was due to decreased
spending on IT infrastructure products by our target customers. License revenues
represented 68% of total revenues for the three months ended September 30, 2002
and 60% of total revenues for the three months ended September 30, 2001. Due to
the economic uncertainty in information technology purchasing demand, we do not
expect license reveneues to increase in the fourth quarter of 2002.
Service Revenues. Service revenues consist of professional services
consulting, technical support and training. Our service revenues were $1.3
million for the three months ended September 30, 2002 and $2.1 million for the
three months ended September 30, 2001, representing a decrease of 36%. The
decrease in service revenues was primarily due to a decline in consulting
service contracts in 2002. Service revenues represented 32% of total revenues
for the three months ended September 30, 2002 and 40% of total revenues for the
three months ended September 30, 2001.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of royalty
charges, packaging, documentation and associated shipping costs. Our cost of
license revenues was $75,000 for the three months ended September 30, 2002 and
$1,000 for the three months ended September 30, 2001. As a percentage of license
revenues, cost of license revenues were 3% for the three months ended September
30, 2002 and 1% for the three months ended September 30, 2001. This increase was
largely due to increased royalty charges for technology licensed from a major
vendor. Cost of license revenues may vary between periods depending on the sales
of any licensed third party products.
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 $691,000 for
the three months ended September 30, 2002 and $975,000 for the three months
ended September 30, 2001, representing a decrease of 29%. This decrease was
primarily due to a reduction in our use of external consultants in 2002 as a
result of the decline in our consulting service contracts. As a percentage of
service revenues, cost of service revenues were 52% for the three months ended
September 30, 2002 and 47% for the three months ended September 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, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses were $1.8 million for the three months ended September 30, 2002 and
$3.7 million for the three months ended September 30, 2001, representing a
decrease of 51%. This decrease was primarily due to a reduction in staffing and
personnel related costs, reduced office space, marketing programs and lower
commissions. Sales and marketing expenses represented 45% of total revenues for
the three months ended September 30, 2002 and 72% of total revenues for the
three months ended September 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 outside software developers. Our
research and development expenses were $1.0 million for the three months ended
September 30, 2002 and $1.2 million for the three months ended September 30,
2001, representing a decrease of 15%. This decrease was primarily due to a
reduction in both employees and external contract staff. Research and
development expense represented 25% of total revenues for the three months ended
September 30, 2002 and 24% of total revenues for the three months ended
September 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,
administrative and general management personnel, legal costs, bad debt
write-offs and the various costs associated with our status as a public company.
Our general and administrative expenses were $798,000 for the three months ended
September 30, 2002 and $1.5 million for the three months ended September 30,
2001, representing a decrease of 45%. This decrease was principally related to
the termination of patent litigation and related legal fees and settlements.
General and administrative expenses represented 19% of total revenues for the
three months ended September 30, 2002 and 28% of total revenues for the three
months ended September 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 $126,000 for the three months ended September 30, 2002 and $245,000 for the
three months ended September 30, 2001, representing a decrease of 49%.
10
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 $(15,000) for the three months ended September 30, 2002 and $14,000 for the
three months ended September 30, 2001, representing a decrease of 207%. This
decrease was primarily due to a reduction in our 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 continue to be 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 September 30, 2002 was
$42,000, 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 $23,000 in the three months ended
September 30, 2002 and $46,000 in the three months ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Revenues
Our total revenues were $12.0 million for the nine months ended September
30, 2002 and $14.8 million for the nine months ended September 30, 2001
representing a decrease of 19%. International revenues were $3.7 million for the
nine months ended September 30, 2002 and $5.6 million for the nine months ended
September 30, 2001, representing a decrease of 34%. In the nine months ended
September 30, 2002, sales to Cablevision accounted for 29% of total revenues and
sales to Salomon Smith Barney accounted for 15% of total revenues. For the nine
months ended September 30, 2001, sales to Salomon Smith Barney accounted for 16%
of total revenues and sales to Cablevision accounted for 11% 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 $7.8 million for the nine months ended September 30, 2002
and $7.8 million for the nine months ended September 30, 2001. License revenues
represented 64% of total revenues for the nine months ended September 30, 2002
and 53% of total revenues for the nine months ended September 30, 2001.
Service Revenues. Service revenues consist of professional services
consulting, customer support and training. Our service revenues were $4.3
million for the nine months ended September 30, 2002 and $7.0 million for the
nine months ended September 30, 2001, representing a decrease of 39%. The
decrease in service revenues was primarily due to a decline in consulting
service contracts in 2002. Service revenues represented 36% of total revenues
for the nine months ended September 30, 2002 and 47% of total revenues for the
nine months ended September 30, 2001.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of royalty
charges, packaging, documentation and associated shipping costs. Our cost of
license revenues was $177,000 for the nine months ended September 30, 2002 and
$7,000 for the nine months ended September 30, 2001. As a percentage of license
revenues, cost of license revenues was 2% for the nine months ended September
30, 2002 and less than 1% for the nine months ended September 30, 2001. This
increase was largely due to increased royalty charges by a major vendor.
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 $2.2 million for the nine months ended
September 30, 2002 and $3.3 million for the nine months ended September 30,
2001, representing a decrease of 34%. This decrease was primarily due to a
reduction in our use of third party consultants in 2002 as a result of the
decline in our consulting service contracts. As a percentage of service
revenues, cost of service revenues was 52% for the nine months ended September
30, 2002 and 48% for the nine months ended September 30, 2001.
11
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 $6.9 million for the nine months ended September 30, 2002 and
$11.9 million for the nine months ended September 30, 2001, representing a
decrease of 42%. This decrease was primarily due to a reduction in staffing and
personnel related costs, reduced office space, marketing programs and lower
commissions. Sales and marketing expenses represented 57% of total revenues for
the nine months ended September 30, 2002 and 80% of total revenues for the nine
months ended September 30, 2001. We are presently targeting sales and marketing
expense levels to be below comparable 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 outside software developers. Our
research and development expenses were $3.2 million for the nine months ended
September 30, 2002 and $4.6 million for the nine months ended September 30,
2001, representing a decrease of 30%. 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 nine months ended
September 30, 2002 and 31% of total revenues for the nine months ended September
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, legal costs, bad debt
write-offs and the various costs associated with our status as a public company.
Our general and administrative expenses were $2.6 million for the nine months
ended September 30, 2002 and $4.2 million for the nine months ended September
30, 2001, representing a decrease of 38%. This decrease was principally related
to the termination of patent litigation and related legal fees and settlements,
reduction in staff and cost management. General and administrative expenses
represented 22% of total revenues for the nine months ended September 30, 2002
and 29% of total revenues for the nine months ended September 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 and
impairment of purchased intangibles was $480,000 for the nine months ended
September 30, 2002 and $3.4 million for the nine months ended September 30,
2001. Based on an evaluation of our purchased intangibles at June 30, 2001, we
recorded an impairment charge of $2.0 million in June 2001 to write down the
carrying value of these assets to their net realizable values, which reflect the
expected economic benefits to be derived from the use of these assets.
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 $5,000 for the nine
months ended September 30, 2002 and $288,000 for the nine months ended September
30, 2001, representing a decrease of 98%. This decrease was primarily due to a
reduction in our cash balances and a reduction in market interest rates. We
expect that net interest income will decrease in future periods as we continue
to use the net proceeds from our initial public offerings and may continue to be
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 September 30, 2002 was
$42,000, 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 $77,000 in the nine months ended
September 30, 2002 and $208,000 in the nine months ended September 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.
12
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;
o shifts in demand for and market acceptance among our various products,
including POWERTIER and our newer products, EDGEXTEND, DIRECTALERT, and
DYNAMAI;
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 possible loss of sales people;
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 an equipment related loan in the maximum principal amount of
$800,000 which has been repaid in full, a second equipment related loan in the
amount of $655,000, and borrowings of $149,000 under a third equipment related
loan for an amount up to $250,000, and capitalized leases. As of September 30,
2002, we had $6.8 million of cash, cash equivalents and short-term investments
and $2.2 million of working capital.
13
Net cash used in operating activities was $131,000 for the nine months ended
September 30, 2002 and $10.8 million for the nine months ended September 30,
2001. For the nine months ended September 30, 2002, cash used in operating
activities was attributable primarily to net operating losses and a decrease in
accounts payable. Those uses were partially offset by depreciation and
amortization, a decrease in accounts receivable and an increase in deferred
revenues. For the nine months ended September 30, 2001, cash used in operating
activities was attributable primarily to net operating losses. Those uses were
partially offset by depreciation and amortization, the impairment of purchased
intangibles and a decrease in accounts receivable.
Net cash used in investing activities was $292,000 in the nine months ended
September 30, 2002 and net cash provided by investing activities was $5.4
million in the nine months ended September 30, 2001. For the nine months ended
September 30, 2002, cash used in investing activities was for the purchase of
property and equipment and the acquisition of purchased intangibles. For the
nine months ended September 30, 2001, cash from investing activities was
generated by converting short-term investments into cash and cash equivalents.
Net cash used in financing activities was $177,000 in the nine months ended
September 30, 2002 and $325,000 in the nine months ended September 30, 2001. For
each of the nine months ended September 30, 2002 ad 2001, cash used in financing
activities was primarily attributable to loan repayments offset by the sale of
common stock as a result of option exercises and borrowings under loan
agreements.
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, an equipment term loan of $655,000 and an equipment loan
for an amount up to $250,000 under which drawdowns are available through January
3, 2003. As of September 30, 2002 we had no borrowings outstanding under the
revolving line of credit facility. As of September 30, 2002 we had $305,000
outstanding under the equipment term loan of $655,000. 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. As of September 30, 2002
we had $149,000 outstanding under the equipment loan for an amount up to
$250,000. Under this facility, borrowings outstanding on January 3, 2003 will
automatically convert to an 18-month term loan having equal monthly payments of
principal and interest. Borrowings under the facility will bear interest at the
bank's prime rate plus 1.0%. The bank's credit facilities require the Company,
among other things, to maintain a minimum tangible net worth of $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 September 30, 2002, the Company's
tangible net worth fell below the minimum tangible net worth ratio then in
effect and the bank waived this event. 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 September 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
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.
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.
14
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 need to achieve market acceptance for our new product introductions,
including DYNAMAI, DIRECTALERT and EDGEXTEND;
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 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 dynamic data
management;
o our unproven ability to compete in a highly competitive market;
o the decline 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 BECOME OR
REMAIN PROFITABLE.
We may not achieve our targeted revenues, and we may not be able to achieve
or maintain profitability in the future. We have incurred net losses each year
since 1996. In particular, we incurred losses of $3.5 million in the nine months
ended September 30, 2002, $15.1 million in 2001, $16.7 million in 2000 and $11.3
million in 1999. As of September 30, 2002, we had an accumulated deficit of
$59.5 million. While we are currently targeting decreases in 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 markets are new and evolving, we cannot
accurately predict either the future growth rate, if any, or the ultimate size
of the markets 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 September 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:
15
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 delisting from the Nasdaq SmallCap Market;
o a dramatic reduction in scope in our planned product development or
marketing efforts; or
o an inability to respond to competitive pressures or take advantage
of market opportunities.
If we are unable to obtain additional financing as and when needed and
on acceptable terms, we may be required to reduce the scope of our planned
product development and marketing efforts, which could jeopardize our business.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF
OUR COMMON STOCK.
Our quarterly operating results have fluctuated significantly in the past
and may continue to fluctuate significantly in the future as a result of a
number of factors, many of which are outside our control. In prior years, we
have often experienced an absolute decline in revenues from the fourth quarter
to the first quarter of the next year. If our future quarterly operating results
are below the expectations of securities analysts or investors, the price of our
common stock would likely decline. The factors that may cause fluctuations of
our operating results include the following:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o shifts in demand for and market acceptance among our various products,
including POWERTIER and our newer products, EDGEXTEND, DIRECTALERT, and
DYNAMAI;
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 possible loss of sales people;
16
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 prospective customers
regarding the use and benefits of our products. Our sales cycle is generally
between three and nine months. A successful sales cycle typically includes
presentations to both business and technical decision makers, as well as a
limited pilot program to establish a technical fit. Our products typically are
purchased as part of a significant enhancement to a customer's information
technology system. The implementation of our products involves a significant
commitment of resources by prospective customers. Accordingly, a purchase
decision for a potential customer typically requires the approval of several
senior decision makers. Our sales cycle is affected by the business conditions
of each prospective customer, as well as the overall economic climate for
technology-related capital expenditures. Due to the relative importance of many
of our product sales, a lost or delayed sale could adversely affect our
quarterly operating results. Our sales cycle is affected by seasonal
fluctuations as a result of our customers' fiscal year budgeting cycles and slow
summer purchasing patterns in Europe.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. In addition, the identity of our
top five customers has changed from year to year. In the nine months ended
September 30, 2002, sales of products and services to our top five customers
accounted for 62% of total revenue with Cablevision and Salomon Smith Barney
accounting for 29% and 15% of total revenues, respectively. In the nine months
ended September 30, 2001, sales of products and services to our top five
customers accounted for 49% of total revenues with Salomon Smith Barney and
Cablevision accounted for 16% and 11% 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. 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 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.
Sales of our EDGEXTEND products currently 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 release or 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.
17
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 and our EDGEXTEND products. 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 and our EDGEXTEND products depend 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.
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
restructuring and employee turnover, 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.
18
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 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.
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.
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 markets are:
o performance, including scalability, integrity and availability;
o ability to provide a competitive return on investment to the customer;
19
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 perception of viability; and
o price.
Our competitors for POWERTIER include BEA Systems (WebLogic), 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. We are targeting that future revenues will contain less
revenue from our POWERTIER products and more from our EDGEXTEND and DIRECTALERT
products.
In the EDGEXTEND market, alternative 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 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, which the Company is
licensed to distribute on a non-exclusive basis.
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 MARKETS FOR INFRASTRUCTURE SOFTWARE FOR NETWORKS AND WEB-BASED PRODUCTS
AND SERVICES DO 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 markets for infrastructure software for networks and web-based
products and services. If these markets do 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.
20
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.
If we are not successful in attracting and retaining these skilled employees,
our sales and product development efforts would suffer. In addition, if one or
more of our key employees resigns to join a competitor or to form a competing
company, the loss of that employee and any resulting loss of existing or
potential customers to a competitor could harm our business. If we lose any key
personnel, we may not be able to prevent the unauthorized disclosure or use of
our technical knowledge or other trade secrets by those former employees.
OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR
SOFTWARE MAY BE DELAYED.
Complex software products often contain errors or defects, particularly when
first introduced or when new versions or enhancements are released. Our products
have in the past contained and may in the future contain errors and defects,
which may be serious or difficult to correct and which may cause delays in
subsequent product releases. Delays in shipment of scheduled software releases
or serious defects or errors could result in lost revenues or a delay in market
acceptance, which could have a material adverse effect on our revenues and
reputation.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS.
Because our customers use our products for important business applications,
errors, defects or other performance problems could result in financial or other
damages to our customers. They could pursue claims for damages, which, if
successful, could result in our having to make substantial payments. Although
our purchase agreements typically contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions. A
product liability claim brought against us, even if meritless, would likely be
time consuming and costly for us to litigate or settle.
A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM INTERNATIONAL SALES, WHICH
COULD DECLINE AS A RESULT OF LEGAL, BUSINESS AND ECONOMIC RISKS SPECIFIC TO
INTERNATIONAL OPERATIONS.
Our future success will depend, in part, on our successful development of
international markets for our products. Approximately 31% of our revenues came
from sales of products and services outside of the United States for the nine
months ended September 30, 2002, and approximately 38% of our revenues came from
sales of products and services outside of the United States for the nine months
ended September 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. 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:
21
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.
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
September 30, 2002, we had approximately 20,231,266 shares of common stock
outstanding. Virtually all of our shares, other than shares held by affiliates,
are freely tradable. In addition, shares held by affiliates are tradable,
subject to the volume and other restrictions of Rule 144.
22
WE HAVE RECEIVED A NOTICE FROM NASDAQ THAT THE COMPANY WILL BE REVIEWED FOR
COMPLIANCE WITH CERTAIN LISTING REQUIREMENTS BY DECEMBER 2, 2002 AND THAT OUR
STOCK MAY BE DELISTED FORM THE NASDAQ SMALLCAP MARKET IF WE ARE NOT IN
COMPLIANCE.
We have received a notice from Nasdaq that if our stock does not meet the
minimum $1.00 closing bid requirement for at least ten consecutive trading days
prior to December 2, 2002, the Nasdaq staff will determine whether we meet the
initial listing criteria for the Nasdaq SmallCap Market, which in our case means
that we will need to have stockholders' equity of at least $5 million. If we
have stockholders' equity of at least $5 million on December 2, 2002, we expect
that we will be granted an additional 180 calendar day grace period to
demonstrate compliance with the $1.00 minimum bid requirement. If we do not have
stockholders' equity of at least $5 million on December 2, 2002, we understand
that the Nasdaq stall will notify us that our securities will be delisted from
the Nasdaq SmallCap Market and that the Company will have a right to appeal this
decision. We currently have stockholders' equity $4.6 million, just under the
listing requirement and are in the process of taking actions in an effort to
come into compliance with this listing criterion. If we receive a delisting
notice from Nasdaq, we intend to appeal it because the maintenance of our Nasdaq
SmallCap Market listing is important to us. If our stock is delisted from the
Nasdaq SmallCap Market, it would trade on the "bulletin board," which is a
dramatically less liquid market. A delisting from the Nasdaq SmallCap Market
could affect our Company reputation and the ability of certain investors to
purchase our stock.
THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER.
Provisions in our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
o establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
o authorizing the board to issue preferred stock;
o prohibiting cumulative voting in the election of directors;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent; and
o establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE
OUR STOCKHOLDERS.
As part of our business strategy, we expect to review acquisition prospects
that we believe would be advantageous to the development of our business. While
we have no current agreements or negotiations underway with respect to any major
acquisitions of third-party technology, we may make acquisitions of businesses,
products or technologies in the future. If we make any acquisitions, we could
take any or all of the following actions, any of which could materially and
adversely affect our financial results and the price of our common stock:
o issue equity securities that would dilute existing stockholders'
percentage ownership;
o incur substantial debt;
o assume contingent liabilities; or
o take substantial charges in connection with the impairment of goodwill
and amortization of other intangible assets.
23
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 at September 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 September 30, 2002. A hypothetical ten percent change in foreign
currency rates at September 30, 2002 would have changed the results of
operations by approximately $17,000. We do not hedge any of our foreign currency
exposures.
ITEM 4. CONTROLS AND PROCEDURES.
Within 90 days prior to the filing of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined at Exchange Act Rules 13a-14(c) and 15d-14(c). Based upon
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and the design of our disclosure controls and procedures may not
achieve our stated goals under all potential future conditions, regardless of
how remote. No significant changes were made to the Company's internal controls
or other factors that could significantly affect these controls subsequent to
the date of their evaluation.
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 September 30, 2002, we have used the net offering proceeds as follows:
Working capital expenditures....................... $ 20.6 million
Acquiring property and equipment................... 2.4 million
Acquiring technologies............................. 3.1 million
---------------
26.1 million
Repayment of equipment related loans............... 1.2 million
Cash and cash equivalents.......................... 6.8 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.
None.
ITEM 5. OTHER INFORMATION.
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the "Act"), we are
required to disclose the non-audit services approved by our Audit Committee to
be performed by Deloitte & Touche LLP, our external auditor. Non-audit services
are defined in the Act as services other than those provided in connection with
an audit or a review of the financial statements of a company. Deloitte & Touche
LLP does not provide any non audit services for the company.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
10.17 Second Amendment to the Restated Loan and Security Agreement
between Persistence Software and Comerica Bank.
10.18 Third Amendment to the Restated Loan and Security Agreement
between Persistence Software and Comerica Bank.
99.1 Certificate of Chief Executive Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certificate of Chief Financial Officer, 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: November 14, 2002
27
CERTIFICATIONS
I, Christopher T. Keene, Chief Executive Officer of the registrant, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Persistence
Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ CHRISTOPHER T. KEENE
-------------------------
Christopher T. Keene
Chief Executive Officer
28
CERTIFICATIONS
I, Christine Russell, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Persistence
Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ CHRISTINE RUSSELL
-----------------------
Christine Russell
Chief Financial Officer
29
EXHIBIT INDEX
Exhibit No.
- -----------
10.17 Second Amendment to the Restated Loan and Security Agreement between
Persistence and Comerica Bank.
10.18 Third Amendment to the Restated Loan and Security Agreement between
Persistence and Comerica Bank.
99.1 Certificate of Chief Executive Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certificate of Chief Financial Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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