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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
_______________
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT 1934
FROM THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 000-25857
PERSISTENCE SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3138935
(STATE OR OTHER JURISDICTION (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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 372-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $4.0 million as of February 28, 2003 based upon the
closing sale price on the Nasdaq National Market reported for such date of $0.25
per share. Shares of Common Stock held by each officer and director and by each
person who owns 10% of more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 24,044,735 shares of the registrant's Common Stock issued and
outstanding as of February 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the 2003 Annual Meeting of Stockholders to be held on June 5,
2003.
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We own or have rights to trademarks or trade names that we use in
conjunction with the sale of our products and services. "Persistence," as well
as the logo for "Live Object Cache," are registered trademarks owned by us. We
have registrations pending for the use of our logo with "Persistence."
"PowerTier," "EdgeXtend" and "The Engine for E-Commerce" are also trademarks of
ours. This annual report on Form 10-K also makes reference to trademarks and
trade names of other companies that belong to them.
Our website is www.persistence.com. We make our annual reports on Form 10-K,
quarterly reports on Form 10-Q current reports on Form 8-K, and amendments to
those reports available free of charge as soon as reasonably practicable as we
file these reports with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS.
COMPANY OVERVIEW
Persistence provides a suite of Data Services products that sit between
existing databases - such as Oracle and DB2 - and application servers - such as
BEA, WebLogic, IBM, WebSphere, and Microsoft .NET. Developers can configure
these products, creating a "Data Services" layer that positions business
information for more efficient access for users, dramatically reduces network
traffic and data latency, and results in better application performance at a
much lower infrastructure cost. Persistence integrated Data Services include:
object-relational mapping, transactional caching, guaranteed synchronization,
"uninterruptible" application fail over and rule-based client notification.
Persistence's Data Services are also cross-platform, providing a "data bridge"
between J2EE, .Net, Java and C++ applications.
Persistence caching solutions help systems "remember" answers from each
processing step. When the system receives a request for which it has an answer,
it can respond immediately, without traveling to back-end databases to generate
an answer. Synchronization technology ensures that these cached answers are
always accurate, even as the source data changes. Customer profile management,
logistics, exchanges, trading desks, and supply chain management systems are
just a few examples of query-intensive online systems that can realize
significant increases in capacity and performance through online caching.
Customers are able to more effectively manage enterprise data through
re-architecting their IT infrastructure using Persistence Data Services
products. Persistence Data Services solutions result in real-time, highly
scalable, distributed applications without incurring the high costs of
additional hardware and replicated databases. Decision makers and customers
located at any location can now have an immediate "business visibility" into
their data, that is, an up-to-date view into the data that they need, when and
where they need it.
Enterprises are creating competitive advantage by achieving the goal of the
zero-latency enterprise through Data Services, the immediate distribution and
management of business information. Delivering real-time data enhances employee
productivity, improves operations, and enables improved relationships with
customers. Data Services also ensures business continuity by providing immediate
fail-over options preventing data center outages from interrupting business
processing.
Our EDGEXTEND data services software for Sun Microsystems' full Java 2
Platform, Enterprise Edition (J2EE, formerly known as Enterprise Java Beans or
EJB) application servers, C++ and .NET application servers offers a data
architecture that integrates with IBM's WebSphere, BEA's WebLogic, and Microsoft
..NET, plus C++ 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 reporting product 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.
Major customers in 2002 consisted of Air France, Applied Biosystems,
Cablevision, Citadel, Eurocontrol, Fiducia AG, Intershop, i2, Lucent, Motorola,
NetJets, Nokia, Reuters Financial Software and Salomon Smith Barney.
2
INDUSTRY BACKGROUND
Today's Information Technology managers are faced with many challenges as
they attempt to scale their existing infrastructure to meet the ever increasing
demands of their users. They are asked to support more users with better
response times, but without a commensurate increase in resources, both people
and money, to meet these challenges. The solutions of past years - replicated
data centers - are no longer a cost-effective option for most IT professionals.
Consequently, they are looking for alternative technology strategies to meet the
performance demands of their corporate enterprise systems and reduce the
associated operating costs.
As systems scale to meet growing demands, companies are finding that many of
their systems are reaching their technological limitations. While network
bandwidth can be a problem, more frequently the absence of real-time data being
available to distributed users on the network is the real limitation on
application performance, resulting in:
o SLOW RESPONSE TIMES: Many enterprise applications were not designed to
scale to handle large numbers of concurrent users. Users accessing these
systems often experience lengthy delays as the number of concurrent
users increases.
o BUSINESS CONTINUITY: Disaster recovery and fail-over capability are
crucial for systems required to operate 24 hours a day, 7 days a week.
Users accessing these systems at peak volume can experience frequent
system crashes.
o LIMITED SCALABILITY: As applications are deployed to more and more
remote users in a system in order to improve the productivity of those
users, the customer needs a system that will scale easily without the
need and expense of additional data centers is essential.
In large part, the problems facing enterprises today are derived from the
continuing evolution and increasing sophistication of enterprise applications.
Simple applications supporting back office systems typically had few users
accessing limited amounts of data. As decision-making based on real-time,
frequently changing data was moved farther out to the edge of the enterprise,
the need for vital information to support these business-critical applications
became paramount. In addition, the need to keep the cost of these systems to a
minimum provided an additional challenge to the system architects. Traditional
system architectures and approaches cannot completely solve the problem. A new
distributed data services infrastructure is required.
The next generation of enterprise applications will require a fundamentally
new data management infrastructure, which will allow application servers to
scale in order to meet the demands of an ever increasing user base and to be
deployed without the need for an expensive back end IT infrastructure. These
platforms must provide:
o REAL-TIME SCALABILITY: accommodate up to thousands of end users with
consistent sub-second response times;
o HIGH AVAILABILITY: handle system failures without interruption and
without losing critical information for potentially thousands of
concurrent users;
o RAPID ADAPTABILITY: allow companies to continuously improve their
business processing through automated development and management of
differentiated business-critical applications; and
o EDGE COMPUTING: enable businesses to extend their processing across
organizational boundaries, support employees, remote users and even
partners and customers.
PERSISTENCE PRODUCTS
Our EdgeXtend family of products provides a data services software
infrastructure that is specifically designed to enable high volume, high
performance, distributed applications. Our products, EDGEXTEND for IBM
WebSphere, EDGEXTEND for BEA WebLogic, EDGEXTEND for C++ and EDGEXTEND for
Microsoft .NET, address the scalability, availability and adaptability demands
that typically occur when delivering business solutions for high demand,
globally distributed enterprise business applications. Our products offer the
following key benefits:
3
REAL-TIME RESPONSE FOR THOUSANDS OF CONCURRENT USERS. Our EDGEXTEND products
were designed specifically to accommodate high volume transaction processing and
the data integrity requirements of distributed applications. EDGEXTEND utilizes
caching technology. Caching is a process in which select data is copied out of
back-end systems and into the server cache, which allows the data to be shared
and manipulated by multiple users. Replication between EDGEXTEND server caches
using the POWERSYNC feature allows a cluster of application servers to provide
highly scalable performance as the number of users increases. This architecture
helps reduce the workload on back-end systems and accelerates application
performance. The effect of this architecture is to minimize unnecessary network
traffic and thereby enable high performance and reliability even with
significant transaction volumes and rapidly changing data. We believe that our
EDGEXTEND products offer superior performance and scalability to support the
deployment of large-scale distributed enterprise applications.
DRAMATIC REDUCTIONS IN TIME-TO-MARKET FOR ENTERPRISE APPLICATIONS. Our
EDGEXTEND products decrease time-to-market and development cycles for
sophisticated applications due to our proprietary and patented
object-to-relational mapping technology. This technology enables the automatic
generation of software code, which minimizes basic, low-level programming tasks,
such as security and database access. EDGEXTEND accelerates development by
giving developers access to data in a familiar way, as software components, and
provides application developers with a framework to rapidly build electronic
commerce applications.
PROTECTS AND LEVERAGES EXISTING INFORMATION TECHNOLOGY INVESTMENTS.
EDGEXTEND enables developers to build new enterprise applications while
simultaneously integrating existing back-end systems. EDGEXTEND'S flexible
architecture integrates with disparate database servers, web servers and
multiple clients, while supporting multiple programming languages and computing
platforms. EDGEXTEND provides enhanced flexibility and inter-operability to link
existing enterprise applications and systems, allowing businesses to leverage
their investments in information technology and extend them to the edge of their
enterprise and beyond.
OPTIMIZED DISTRIBUTED DATA SERVICES ARCHITECTURE. All our products are built
on the core Persistence technologies of Object/Relational Mapping, Dynamic
Caching and Cache Synchronization. This technology, called Distributed Dynamic
Caching (DDC), allows for a distributed data services architecture that is
highly scalable, suitable for high volume transaction oriented applications, and
capable of supporting thousands of concurrent users. In addition, this
architecture is designed to be implemented in a globally distributed enterprise
environment without the need for an expensive back-end infrastructure. It
provides for data center type performance without the need for multiple data
centers.
PERSISTENCE STRATEGY
Our goal is to fundamentally restructure how companies extend and leverage
their vital business information by enabling a distributed data services
infrastructure.
INCREASE PARTNERSHIPS WITH INDEPENDENT SOFTWARE VENDORS (ISVS). We intend to
continue to develop and expand relationships with ISVs, in particular, IBM
WebSphere and BEA WebLogic. Through our EDGEXTEND product for WebSphere and
EDGEXTEND for WebLogic we now offer a complementary J2EE product, which
leverages the unique data management capability of Persistence's technologies.
As part of the IBM and BEA partner programs, we believe that these relationships
will provide additional marketing and sales channels for our products and
facilitate the successful deployment of customer applications.
CONTINUE TO EXPAND OUR GROWING OEM BUSINESS. We intend to become a market
leader in providing data services infrastructure software to enable
sophisticated enterprise applications. We have worked with several customers who
have successfully built their global enterprise applications on core Persistence
technologies and are deploying these applications to their customers. We will
continue to collaborate with our innovative and advanced customers to develop
and deliver product features that address their needs. We believe that this
collaboration focuses our overall product development effort and speeds our
time-to-market.
4
WORK WITH SYSTEM INTEGRATORS TO DELIVER COMPLETE SOLUTIONS. In addition to
extending our technology leadership, we will work with major System Integrators
(SI's) such as BearingPoint (formerly KPMG Consulting) and IBM Global Services
to provide our customers the most complete data services solutions for their
distributed applications. These system integrators will be an extension of, and
a complement to, our existing professional services organization. By working
with these SI's on joint customer engagements we can leverage their services
expertise and customer channel and they can leverage our products and technology
to provide unique, differentiated data services solutions.
EXPAND PRODUCT PLATFORM TO OFFER COMPLEMENTARY SOLUTIONS. In addition to
extending our technology leadership, we intend to broaden and enhance our
product platform to incorporate complementary solutions for developing and
deploying sophisticated enterprise applications. We will continue to make
investments in our research and development organization for many of these
product initiatives. We will also consider, from time to time, bolstering these
internal efforts with strategic acquisitions, and partnerships with software
vendors who have complementary product offerings. The addition of these
complementary technologies will enable us to offer a more complete platform for
our customers.
LEVERAGE INSTALLED CUSTOMER BASE. We believe there are significant
opportunities to expand the use of our products throughout our current customer
base. This is particularly true for customers who have adopted our technology
for a particular part of their business, but who have standardized on IBM's
WebSphere or BEA's WebLogic for their mainstream applications. We now have the
opportunity to re-engage with those customers on a broader basis as they deploy
their applications throughout their enterprise. Through Persistence's
distributed data services architecture we can enable our customers to scale and
deploy applications without the need for replicated data centers, in some cases,
saving them millions of dollars.
MAINTAIN OUR INTERNATIONAL PRESENCE. We believe there are significant
international opportunities for our products and services, in particular in
Europe and Asia. Currently, we have established direct sales operations in the
United Kingdom and Germany. In addition to our direct sales operations, we also
distribute our products throughout Europe and Asia through distributors and
systems integrators. We intend to extend these international third-party
distributor and systems integrator relationships.
PRODUCTS
EDGEXTEND
Our EDGEXTEND for WebSphere, EDGEXTEND for WebLogic, and EDGEXTEND for .NET
products are designed to make the performance and reliability of Persistence's
patented DDC technology available to applications running on IBM's WebSphere and
BEA's WebLogic application servers, as well as applications built on Microsoft
..NET. EDGEXTEND provides a new distributed data services architecture, which
complements J2EE compliant, and other, application servers. Through the J2EE
Connector Architecture the data access layer is replaced by EDGEXTEND, allowing
the application servers to have the benefits of DDC without changing their
existing business and presentation logic. In addition, with this distributed
data architecture, WebSphere and WebLogic application servers can operate
outside of a data center in a "virtual data center" without the requirement of
an expensive relational database infrastructure.
EDGEXTEND FOR C++ (formerly POWERTIER for C++)
Our EDGEXTEND for C++ product is a high-performance transactional
application server, which is based on our patented technologies and the Common
Object Request Broker Architecture, or CORBA, standard for communication between
distributed applications. The CORBA standard is managed by an industry group
called the Object Management Group. Our EDGEXTEND for C++ platform runs on the
Windows and Unix operating systems. We have licensed the J2EE platform and are a
contributor to the Java standard.
5
The following table describes the major features and benefits for EDGEXTEND
for IBM WebSphere, BEA WebLogic, and Microsoft .NET and EDGEXTEND FOR C++:
FEATURES BENEFITS
-------- --------
Shared transactional object cache Enables real-time scalability by reducing
database traffic
Object-relational mapping that Speeds application development by managing
provides abstraction to database database details for developer
representation
Optimized usage of native database Improves application capacity by
libraries efficiently using database resources
Application server cache Improves application capacity by caching
synchronization unpredictably changing data
Application server failover Delivers high availability by replicating
information across clusters of application
server cache
DIRECT ALERT
DIRECTALERT is an end-to-end solution for adding proactive notification
services to business applications, allowing information to be delivered to
decision makers and customers when and how they need it. DIRECTALERT is a J2EE
application server add-in designed to provide sophisticated data and event
monitoring as well as filtering. DIRECTALERT is designed to proactively notify
clients ranging from desktop applications and ordinary web browsers to mobile
phones and television set-top boxes.
The following table describes the major features and benefits for the
DIRECTALERT product:
FEATURES BENEFITS
-------- --------
Intelligent Server Engine Provides sophisticated and non-intrusive
data monitoring, selection and filtering
Flexible and powerful clients with Enables Java devices (mobile phones to
"zero footprints" desktop PCs) to receive proactive
notification resulting in business
decisions being made on updated data
Rapid development and Adds functionality to existing applications
implementation without modifications as it is built with
100% Java and XML. Server side required
only query definitions. No modification is
required to existing application logic.
POWERTIER
Persistence continues to sell current and earlier versions of POWERTIER for
J2EE application server to current customers. POWERTIER for J2EE incorporates
our patented technologies into a J2EE-based transactional server. The J2EE
standard, as defined by the Java Software division of Sun Microsystems, has
gained rapid acceptance as a programming language for complex enterprise
applications because it provides a consistent way to program and integrate
services for companies building distributed business-to-business applications
with the Java programming license. POWERTIER for J2EE delivers scalability, high
availability, and rapid adaptability for high volume, high performance, and
distributed enterprise applications.
We believe that research and product development will be a key to our
success as a leader in providing data services software. Our research and
development expenditures totaled $4.1 million for 2002, $5.6 million for 2001
and $8.1 million for 2000.
6
CUSTOMERS
Our software products are licensed to customers worldwide for use in a wide
range of enterprise and electronic commerce applications, including real-time
electronic trading, supply chain management, network management, application
outsourcing and logistics management. Our services consist of professional
consulting services, technical support and training. The following table lists a
selection of customers who have purchased a significant amount of our products
or services in 2002, 2001 or 2000 (defined as approximately 1% or more of our
total revenues in any year.)
E-COMMERCE/INTERNET FINANCIAL SERVICES/EXCHANGES
Cisco Systems Chase/JP Morgan
i2 CNP Assurances
Intershop Citadel Investment Group
Credit Suisse First Boston
Fiducia AG
Kinetech Services
Reuters Financial Software
Salomon Smith Barney
Wells Fargo
COMMUNICATIONS Zurich Arippina Gruppe
4T Solutions
AT&T
CSC Holdings (Cablevision)
Lucent Technologies
Motorola TRANSPORTATION & LOGISTICS
Nokia Air France
Spirent Communications Eurocontrol
Sprint Federal Express
NetJets
Sabre Group Holdings (American Airlines)
MANUFACTURING & DISTRIBUTION
Hewlett Packard
Nippon Steel
Delco
OTHER
Applied Biosystems
Bundesanstalt fur Arbeit
Convergys Information
Infron Technologies
Refco Group
In 2002, sales of products and services to Cablevision accounted for 26% of
our total revenues and sales to Salomon Smith Barney accounted for 13% of our
total revenues. In 2001, sales of products and services to Salomon Smith Barney
accounted for 15% of our total revenues and sales to Cablevision accounted for
11% of our total revenues. In 2000, sales of products and services to Salomon
Smith Barney accounted for 16% of our total revenues.
SALES AND MARKETING
We sell our products through both a direct sales force and third party
distributors. As of December 31, 2002, we had 30 people in our sales and
marketing organization, of which 21 were in the United States, and 9 were in
European offices. We intend to increase the size of our direct sales force as
well as focusing on indirect distribution channels. While our overall 2003 sales
and marketing expense compared to 2002 is expected to decrease, reductions in
non-personnel related programs are expected to offset expenses for new hirings.
7
Our sales cycle is relatively long, generally between three and nine months.
A successful sales cycle typically includes presentations to both business and
technical decision makers, as well as a limited pilot program, a proof of
concept, to establish a technical fit.
We have engaged in, and may continue to engage in, a variety of targeted
marketing activities, including public relations, seminars, trade shows, lead
generation programs and customer-oriented web site management. We have also made
substantial marketing investments in education and training for the J2EE and C++
markets. We hold periodic seminars in order to train developers.
We intend to continue to develop and expand relationships with OEMs,
consultants, system integrators and independent software vendors (ISVs). We
believe these third parties can effectively market our products, particularly
EDGEXTEND, through their existing relationships with our target market
customers. We believe that these relationships will provide additional marketing
and sales channels for our products and facilitate the successful deployment of
customer applications. We are currently working with multiple consultants,
system integrators such as BearingPoint and ISV partners, including IBM and BEA,
with whom we announced partner agreements in 2001.
In international markets, we plan to expand our sales through indirect
channels, such as distributors agents and OEMs. As of December 31, 2002, we were
represented by one international distributor, who sells our products in Asia.
COMPETITION
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
o performance, including scalability, integrity and availability;
o ability to provide a complete software platform;
o flexibility;
o use of standards-based technology (e.g. J2EE);
o ease of integration with customers' existing enterprise systems;
o ease and speed of implementation;
o quality of support and service;
o security;
o company reputation; and
o price.
In the EDGEXTEND market, alternative technology is available from a variety
of sources. Companies such as Versant, Gemstone 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. Companies such as
SpiritSoft, TIBCO, and IBM provide message-oriented middleware software that 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.
8
We continue to sell current and earlier versions of POWERTIER for J2EE
application server to current customers. Our competitors for POWERTIER include
both publicly and privately-held enterprises, including BEA Systems (WebLogic),
IBM (WebSphere), Oracle (OAS), Secant Technologies and Sun Microsystems (Sun ONE
Application Server). Many customers may not be willing to purchase our POWERTIER
products because they have already invested heavily in databases and other
enterprise software components offered by these competing companies. Many of
these competitors have pre-existing customer relationships, longer operating
histories, greater financial, technical, marketing and other resources, greater
name recognition and larger installed bases of customers than we do.
INTELLECTUAL PROPERTY RIGHTS
Our performance may depend on our ability to protect our proprietary rights
to the technologies used in our principal products. If we are not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and services, which would harm our business.
We rely on a combination of patents, copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights, but these legal means afford only limited protection. As
of February 28, 2003, we had five issued United States patents and two pending
United States patent applications with allowable subject matter. Despite any
measures taken to protect our intellectual property, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. In addition, the laws of some foreign countries may not
protect our intellectual property rights as fully as do the laws of the United
States. Thus, the measures we are taking to protect our intellectual property
rights in the United States and abroad may not be adequate. Finally, our
competitors may independently develop similar technologies.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. As the number of entrants
into our market increases, the possibility of an intellectual property claim
against us grows. For example, we may be inadvertently infringing a patent of
which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.
In March 1998, we entered into a license agreement with Sun Microsystems,
pursuant to which we granted Sun Microsystems rights to manufacture and sell, by
itself and not jointly with others, products under a number of our patents and
Sun Microsystems granted us rights to manufacture and sell, by ourselves and not
jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell competing products that would, in
the absence of this license agreement, infringe our patents. Under this
agreement, Sun Microsystems made a one-time payment to us. Neither Sun
Microsystems nor we can transfer the license without the consent of the other
party.
In January 2001, we entered into a license agreement with both webGain and
Secant to manufacture and sell products under three of our patents. Under this
agreement, both webGain and Secant made a one-time payment to us.
EMPLOYEES
As of December 31, 2002, we had 68 full-time employees, including 30 in
sales and marketing, 26 in research and development and technical services, and
12 in general and administrative functions. Our relationships with our employees
are generally good. From time to time, we also employ independent contractors to
support our sales and marketing, research and development, professional services
and administrative organizations.
9
EXECUTIVE OFFICERS
The following table sets forth specific information regarding our executive
officers as of February 28, 2003:
NAME AGE POSITION
---- --- --------
Christopher T. Keene..........42 Chief Executive Officer
Christine Russell.............53 Chief Financial Officer and Secretary
Derek Henninger...............40 Vice President of Worldwide Field
Operations
Ed Murrer.....................53 Vice President of Marketing
Vivek Singhal.................34 Vice President of Engineering
Each executive officer serves at the sole discretion of the Board of
Directors.
CHRISTOPHER T. KEENE co-founded Persistence and has served as Chief
Executive Officer and a director since June 1991 and as Chairman of the Board
since April 1999. From June 1991 to April 1999, Mr. Keene also served as
President. Before founding Persistence, Mr. Keene worked at McKinsey & Company,
Ashton-Tate and Hewlett-Packard. Mr. Keene holds a B.S. degree in Mathematical
Sciences with honors from Stanford University and an M.B.A. degree from The
Wharton School at the University of Pennsylvania.
CHRISTINE RUSSELL joined Persistence in October 1997 and has served as Chief
Financial Officer and Secretary since December 1997. From October 1995 to
October 1997, she served as Chief Financial Officer for Cygnus Solutions, an
open source platform software company. Previously, Mrs. Russell was CFO of
Valence Technology and served in various senior financial positions with Shugart
Corporation, a subsidiary of Xerox. She holds a B.A. degree and an M.B.A. degree
from Santa Clara University and serves on the Board of Directors of Peak Ltd.
International.
DEREK HENNINGER co-founded Persistence and served as Vice President of
Engineering from June 1991 until January 2002 when he became Vice President of
Customer Care and in January 2003 he became Vice President of Worldwide Field
Operations which includes all field sales and technical resources. Previously,
Mr. Henninger worked in the Data Interpretation Division of Metaphor
Corporation, a software and hardware company, from September 1990 to June 1991.
Mr. Henninger holds a B.A. degree in Economics and a B.S. degree in computer
Science and Mathematics from the University of California at Davis.
ED MURRER joined Persistence in July 2001 as Vice President of Marketing.
Mr. Murrer was the Senior Vice President of Sales and Marketing at Xcert
International, an enterprise security software company, from March 2000 to March
2001 when Xcert was sold to RSA Security. From July 1997 to March 2000, Mr.
Murrer was Vice President, Business Development at Veridicom, a biometrics
security software company. He holds a B.S. degree in Mechanical Engineering,
with highest honors, and a M.S. degree in Mechanical Engineering from Purdue
University.
VIVEK SINGHAL joined Persistence in April 1995 as a Software Engineer. In
January 2002, he was promoted to Vice President, Engineering. He holds a B.S.
degree in Computer Science from the Massachusetts Institute of Technology and a
Ph.D. in Computer Science from the University of Texas at Austin.
ITEM 2. PROPERTIES.
We are headquartered in San Mateo, California, where we lease approximately
17,000 square feet of office space under a lease expiring on December 31, 2004.
We have an engineering staff facility in San Diego, where we lease approximately
6,000 square feet of office space under a lease expiring on August 31, 2004. We
also maintain sales offices in other U.S. states, the United Kingdom and
Germany. We believe that our existing facilities are adequate to meet our
current and foreseeable requirements or that suitable additional or substitute
space will be available as needed.
10
ITEM 3. LEGAL PROCEEDINGS.
We are not currently subject to any material legal proceedings. We may,
however, from time to time become a party to various legal proceedings that
arise in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK. Our common stock was traded on the Nasdaq
National Market under the symbol PRSW from the effective date of our initial
public offering on June 24, 1999 until September 12, 2002 at which time we moved
our stock listing to the Nasdaq SmallCap Market. Prior to the initial public
offering, no public market existed for our common stock. The price per share
reflected in the table below represents the range of low and high closing sale
prices for our common stock as reported in the Nasdaq National Market (before
September 12, 2002) or the Nasdaq SmallCap Market (both on and after September
12, 2002) for the periods indicated.
HIGH LOW
-------- --------
For The Year Ended December 31, 2001:
First Quarter......................................... $ 4.50 $ 1.00
Second Quarter........................................ $ 1.25 $ 0.48
Third Quarter......................................... $ 0.99 $ 0.15
Fourth Quarter........................................ $ 1.35 $ 0.19
For The Year Ended December 31, 2002:
First Quarter......................................... $ 1.85 $ 0.87
Second Quarter........................................ $ 1.00 $ 0.53
Third Quarter......................................... $ 0.82 $ 0.42
Fourth Quarter........................................ $ 0.72 $ 0.30
We had 159 stockholders of record as of February 28, 2003, including several
holders who are nominees for an undetermined number of beneficial owners.
DIVIDEND POLICY. We have never paid dividends on our common stock or
preferred stock. We currently intend to retain any future earnings to fund the
development of our business. Therefore, we do not currently anticipate declaring
or paying dividends in the foreseeable future. In addition, our line of credit
agreement prohibits us from paying dividends.
RECENT SALES OF UNREGISTERED SECURITIES. On November 26, 2002 we issued
3,758,692 shares of our common stock at a price of $0.5321 per share, and
warrants to purchase up to 1,205,130 shares of our common stock at an exercise
price of $0.75 per share to certain purchasers affiliated with Needham Capital
Partners. The warrants expire on the earlier of November 26, 2007 or the closing
of a merger, acquisition or sale of substantially all of the assets of
Persistence. In issuing these securities we relied upon Section 4(2) of the
Securities Act on the basis that the transaction did not involve a public
offering.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this annual report on Form 10-K.
The consolidated statements of operations data for the years ended December 31,
2002, 2001 and 2000 and the consolidated balance sheet data at December 31, 2002
and 2001, are derived from audited consolidated financial statements included
elsewhere in this annual report on Form 10-K. The consolidated statement of
operations data for the years ended December 31, 1999 and 1998, and the
consolidated balance sheet data as of December 31, 2000, 1999 and 1998 are
derived from audited financial statements not included in this annual report on
Form 10-K.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License ......................................... $ 9,061 $ 10,561 $ 17,684 $ 10,890 $ 7,478
Service ......................................... 5,525 8,810 7,593 3,553 2,682
--------- --------- --------- --------- ---------
Total revenues .......................... 14,586 19,371 25,277 14,443 10,160
Loss from operations .............................. (5,451) (15,391) (17,857) (12,165) (4,090)
--------- --------- --------- --------- ---------
Net loss .......................................... $ (5,440) $(15,132) $(16,726) $(11,306) $ (4,089)
========= ========= ========= ========= =========
Basic and diluted net loss per share(1) ........... $ (0.26) $ (0.76) $ (0.87) $ (0.86) $ (0.59)
========= ========= ========= ========= =========
Shares used in basic and diluted net loss per
share calculation ............................... 20,529 19,919 19,330 13,091 6,879
========= ========= ========= ========= =========
AS OF DECEMBER 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.. $ 8,903 $ 7,411 $ 19,490 $ 29,652 $ 4,938
Working capital.................................... 4,942 6,783 17,289 29,582 3,384
Total assets....................................... 11,100 13,755 33,641 39,092 7,064
Long-term obligations.............................. 784 421 932 354 714
Total stockholders' equity......................... 4,711 7,944 22,556 32,018 3,422
__________
(1) Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding for the period
(excluding shares subject to repurchase). Diluted net loss per common share
was the same as basic net loss per common share for all periods presented,
since the effect of any potentially dilutive securities is excluded as they
are anti-dilutive because of the company's net losses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our consolidated
financial statements as of December 31, 2002 and 2001 and for each of the years
ended December 31, 2002, 2001 and 2000, included elsewhere in this annual report
on Form 10-K. In addition, this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other parts of this annual
report on Form 10-K contain forward-looking statements that involve risks and
uncertainties. Words such as "anticipates," "believes," "plans," "expects,"
"future," "intends," "targeting," and similar expressions identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed or forecasted. Factors
that might cause such 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 annual report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. We
assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting forward-looking
statements.
13
OVERVIEW
Persistence provides a suite of Data Services products that sit between
existing databases - such as Oracle and DB2 - and application servers - such as
BEA, WebLogic, IBM, WebSphere, and Microsoft .NET. Developers can configure
these products, creating a "Data Services" layer that positions business
information for more efficient access for users, dramatically reduces network
traffic and data latency, and results in better application performance at a
much lower infrastructure cost. Persistence integrated Data Services include:
object-relational mapping, transactional caching, guaranteed synchronization,
"uninterruptible" application fail over and rule-based client notification.
Persistence's Data Services are also cross-platform, providing a "data bridge"
between J2EE, .Net, Java and C++ applications.
Persistence caching solutions help systems "remember" answers from each
processing step. When the system receives a request for which it has an answer,
it can respond immediately, without traveling to back-end databases to generate
an answer. Synchronization technology ensures that these cached answers are
always accurate, even as the source data changes. Customer profile management,
logistics, exchanges, trading desks, and supply chain management systems are
just a few examples of query-intensive online systems that can realize
significant increases in capacity and performance through online caching.
Customers are able to more effectively manage enterprise data through
re-architecting their IT infrastructure using Persistence Data Services
products. Persistence Data Services solutions result in real-time, highly
scalable, distributed applications without incurring the high costs of
additional hardware and replicated databases. Decision makers and customers
located at any location can now have an immediate "business visibility" into
their data, that is, an up-to-date view into the data that they need, when and
where they need it.
Enterprises are creating competitive advantage by achieving the goal of the
zero-latency enterprise through Data Services, the immediate distribution and
management of business information. Delivering real-time data enhances employee
productivity, improves operations, and enables improved relationships with
customers. Data Services also ensures business continuity by providing immediate
fail-over options preventing data center outages from interrupting business
processing.
Our EDGEXTEND data services software for Sun Microsystems' full Java 2
Platform, Enterprise Edition (J2EE, formerly known as Enterprise Java Beans or
EJB) application servers, C++ and .NET application servers offers a data
architecture that integrates with IBM's WebSphere, BEA's WebLogic, and Microsoft
..NET, plus C++ 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 reporting product 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.
Major customers in 2002 consisted of Air France, Applied Biosystems,
Cablevision, Citadel, Eurocontrol, Fiducia AG, Intershop, i2, Lucent, Motorola,
NetJets, Nokia, Reuters Financial Software and Salomon Smith Barney.
Our revenues, which consist of software license revenues and service
revenues, totaled $14.6 million in 2002, $19.4 million in 2001, and $25.3
million in 2000. 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 EDGEXTEND and DIRECTALERT in 2002,
we have a limited operating history in the data services markets. We currently
expect that sales of our older POWERTIER products will continue to contribute 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 and Germany. Revenues
from licenses and services to customers outside the United States were $4.8
million in 2002, $7.4 million in 2001, and $7.2 million in 2000 which
represented approximately 33% of total revenues for 2002, 38% of total revenues
for 2001, and 28% of total revenues for 2000. 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 55% of total revenues in 2002, 45% of total revenues in
2001, and 40% of total revenues in 2000. In the future, it is likely that a
relatively few large customers could continue to account for a relatively large
proportion of our revenues and these customers are likely to differ year to
year.
14
To date, we have sold our products primarily through our direct sales force,
and we will need to continue to hire sales people, including 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 independent software
vendors, systems integrators, 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.
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. The total number of our full-time employees decreased from 81 as of
December 31, 2001 to 68 as of December 31, 2002, representing a decrease of 16%
as a result of periodic assessments during the year of efficient staffing
requirements. We have incurred net losses in each quarter since 1996 and, as of
December 31, 2002, had an accumulated deficit of $61.4 million. We are currently
targeting that sales and marketing expenses, research and development expenses,
and general and administrative expenses for 2003 will be below 2002 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. While
we are targeting to begin achieving profitability on a quarterly basis in the
second half of 2003, we may not achieve it. Our success depends significantly
upon broad market acceptance of our recently introduced EDGEXTEND and, to a
lesser degree, the 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to revenue recognition, bad
debts, intangible assets, income taxes, restructuring costs, and contingencies
and litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
- - REVENUE RECOGNITION. Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. In addition, our
revenue recognition determines the timing of certain expenses, such as
commissions. We follow specific and detailed guidelines in measuring and
recognizing revenue. 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. For sales made through distributors, revenue is
recognized upon shipment. Distributors have no right of return. Royalty revenues
are recognized when the software or services has been delivered, collection is
15
reasonably assured and the fees are determinable. 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. While more infrequent, arrangements that require significant
modification or customization of software are recognized under the completion of
contract method.
- - BAD DEBTS. Our bad debt policy requires that we maintain a specific allowance
for certain doubtful accounts and a general allowance for the majority of the
non-specifically reserved accounts. These allowances provide for estimated
losses resulting from the inability or refusal of our customers to make required
payments. We analyze such factors as historical bad debt experience, customer
payment patterns and current economic trends. This analysis requires significant
judgment. If the financial condition of the company's customers were to
deteriorate further, additional allowances would generally be required resulting
in future losses that are not included in our allowances for doubtful accounts
at December 31, 2002.
- - PURCHASED TECHNOLOGY AND INTANGIBLES. Our business acquisitions typically
resulted in goodwill and other intangible assets, which affect the amount of
future period amortization expense and possible impairment expense that we will
incur. The determination of the value of such intangible assets requires
management to make estimates and assumptions that affect our consolidated
financial statements and operating results. Accordingly in 2002, we took an
impairment charge of $160,000. In 2001, we took an impairment charge of $2.0
million.
- - STOCK COMPENSATION. We account for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no accounting
recognition is given to employee stock options granted with an exercise price
equal to fair market value of the underlying stock on the grant date. Upon
exercise, the net proceeds and any related tax benefit are credited to
stockholders' equity. Our operating results would be affected if other
alternatives were used. Information about the impact on our operating results of
using the alternative of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
is included in Note 1 of the "Notes to Consolidated Financial Statements,"
included elsewhere in this report.
- - INCOME TAXES. Our income tax policy records the estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets, as well as
operating loss and tax credit carry-forwards. We follow specific and detailed
guidelines regarding the recoverability of any tax assets recorded on the
balance sheet and provide any necessary allowances as required.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
REVENUES
Our revenues were $14.6 million for 2002 and $19.4 million for 2001
representing a decrease of 25%. International revenues were $4.8 million for
2002 and $7.4 million for 2001 representing a decrease of 35%. For 2002, sales
to Cablevision accounted for 26% of total revenues, sales to Salomon Smith
Barney accounted for 13% of total revenues, and sales to our top five customers
accounted for 55% of total revenues. For 2001, sales to Salomon Smith Barney
accounted for 15% of total revenues, sales to Cablevision accounted for 11% of
total revenues, and sales to our top five customers accounted for 45% of total
revenues.
LICENSE REVENUES. License revenues consist of licenses of our software
products, which generally are priced based on the number of users or central
processing units deploying our software. License revenues were $9.1 million for
2002 and $10.6 million for 2001 representing a decrease of 14%. License revenues
represented 62% of total revenues for 2002 and 55% of total revenues for 2001.
The decrease in software license revenues was primarily due to decreased
spending on IT infrastructure products by our target customers. Given the
continuing dramatically reduced level of information technology spending,
license revenues may fluctuate substantially over the next several quarters. In
addition, for the same reason, our revenues may be flat to down for 2003
compared to 2002.
16
SERVICE REVENUES. Service revenues consist of professional services
consulting, customer support and training. Our service revenues were $5.5
million for 2002 and $8.8 million for 2001, representing a decrease of 37%. The
decrease in service revenues was primarily due to a decline in consulting
service contracts in 2002. Service revenues represented 38% of total revenues
for 2002 and 45% of total revenues for 2001.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists of royalties,
packaging, documentation and associated shipping costs. Our cost of license
revenues was $286,000 for 2002 and $14,000 for 2001. This increase was largely
due to increased royalty charges by a third party software vendor because we
sold more software that required payment of royalties. Cost of license revenues
as a percentage of license revenues may vary between periods due to royalty
charges from third party software vendors.
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 $2.7 million
for 2002 and $4.0 million for 2001, representing a decrease of 31%. This
decrease was primarily due to a reduction in our use of external consultants in
2002 as a result of the decline in both our technical support and consulting
service contracts. As a percentage of service revenues, cost of service revenues
were 50% for 2002 and 45% for 2001. Because a large portion of our cost of
service revenues is fixed, the percentage increase was due in part to the
decrease in our service revenues. Cost of service revenues as a percentage of
service revenues may vary between periods due to our use of consultants.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, benefits, commissions and bonuses earned by sales and marketing
personnel, travel and entertainment, and promotional expenses. Our sales and
marketing expenses were $8.7 million for 2002 and $14.4 million for 2001,
representing a decrease of 40%. This decrease was primarily due to a reduction
in staffing and personnel related costs, reduced office space and lower
commissions based on lower sales revenues. Sales and marketing expenses
represented 59% of total revenues for 2002 and 74% of total revenues for 2001.
We are presently targeting that 2003 sales and marketing expense levels will be
lower than comparable 2002 expense levels.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits for software developers, technical managers
and quality assurance personnel as well as payments to external software
consultants. Our research and development expenses were $4.1 million for 2002
and $5.6 million for 2001, representing a decrease of 26%. This decrease was
primarily related to a reduction in both employees and external contract staff.
Research and development expenses represented 28% of total revenues for 2002 and
29% of total revenues for 2001. We are presently targeting that 2003 research
and development expense levels will be lower than comparable 2002 expense
levels.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and executive management personnel, legal costs, accounting
costs, bad debt write-offs and various costs associated with our status as a
public company. Our general and administrative expenses were $3.5 million for
2002 and $5.5 million for 2001, representing a decrease of 37%. This decrease
was primarily related to the termination of patent litigation and related legal
fees and settlements, and a reduction in bad debt expense. General and
administrative expenses represented 24% of total revenues for 2002 and 29% of
total revenues for 2001. We are presently targeting that 2003 general and
administrative expense levels will be lower than comparable 2002 expense levels.
AMORTIZATION AND WRITE-DOWN OF PURCHASED INTANGIBLES. Amortization of
purchased intangibles was $768,000 for 2002 and $3.6 million for 2001
representing a decrease of 79%. In December 2002, write-off of purchased
intangibles amounted to $160,000. In June 2001, write-off of intangibles and
goodwill amounted to $2.0 million.
17
RESTRUCTURING COSTS. Restructuring costs consist primarily of expenses
associated in a reduction in employee headcount and the closure of excess field
offices. In 2002, no restructuring costs were incurred. We restructured several
functions during 2001. This resulted in a one-time charge of $1.7 million. The
majority of this charge was related to severance and other employee related
benefit costs.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense)
consists primarily of earnings on our cash, cash equivalents and short-term
investment balances, offset by interest expense related to obligations under
capital leases and other borrowings, and various miscellaneous state and foreign
taxes, and other expenses. Net interest and other income was $11,000 for 2002
and $259,000 for 2001, representing a decrease of 96%. This decrease was
primarily due to a reduction in our cash balances until November 2002 when we
completed a $2 million common stock sale to purchasers affiliated with Needham
Capital Partners, and a reduction in market interest rates.
STOCK-BASED COMPENSATION. Some options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value of
the stock price for accounting purposes was greater than the fair market value
of the stock as determined by the Board of Directors on the date of grant or
issuance. Total deferred stock compensation associated with equity transactions
as of December 31, 2002 was $31,000, 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
$88,000 in 2002 and $245,000 in 2001. We expect to record amortization expense
related to these securities of approximately $31,000 in 2003.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
As of December 31, 2002, we had $55.9 million of federal and $8.6 million of
state net operating loss carryforwards available to offset future taxable
income. The federal net operating loss carryforwards expire through 2022, while
the state net operating loss carryforwards expire through 2012. The net
operating loss carryforwards for state tax purposes are substantially less than
for federal tax purposes, primarily because only 50% of state net operating loss
carryforwards can be utilized to offset future state taxable income and because
state net operating loss carryforwards generated in earlier years have already
expired. The Tax Reform Act of 1986 limits the use of net operating loss
carryforwards in situations where changes occur in the stock ownership of a
company. If we should be acquired or otherwise have an ownership change, as
defined in the Tax Reform Act of 1986, our utilization of these carryforwards
could be restricted.
As of December 31, 2002, the Company also had research and development tax
credit carryforwards of $1.7 million and $1.6 million available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires in 2022, while the state credit carryforward has no expiration.
We have placed a full valuation allowance against our net deferred tax
assets due to the uncertainty surrounding the realization of these assets. We
evaluate on a quarterly basis the recoverability of the net deferred tax assets
and the level of the valuation allowance. If and when we determine that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES
Our revenues were $19.4 million for 2001 and $25.3 million for 2000
representing a decrease of 23%. International revenues were $7.4 million for
2001 and $7.2 million for 2000, representing an increase of 3%. For 2001, sales
to Salomon Smith Barney accounted for 15% of total revenues, sales to
Cablevision accounted for 11% of total revenues, and sales to our top five
customers accounted for 45% of total revenues. For 2000, sales to Salomon Smith
Barney accounted for 16% of total revenues and sales to our top five customers
accounted for 40% of total revenues.
18
LICENSE REVENUES. License revenues were $10.6 million for 2001 and $17.7
million for 2000, representing a decrease of 40%. License revenues represented
55% of total revenues for 2001 and 70% of total revenues for 2000. The decrease
in software license revenues was primarily due to a general reduction in
information technology spending for 2001, as compared to the more buoyant levels
experienced in 2000. This was particularly noticeable within our domestic
markets.
SERVICE REVENUES. Our service revenues were $8.8 million for 2001 and $7.6
million for 2000, representing an increase of 16%. The increase in service
revenues was primarily due to our focus upon significant consulting engagements
with Salomon Smith Barney and other key customers. Service revenues represented
45% of total revenues for 2001 and 30% of total revenues for 2000.
COST OF REVENUES
COST OF LICENSE REVENUES. Our cost of license revenues was $14,000 for 2001
and $304,000 for 2000. The cost of license revenues for 2000 included
significant royalties that did not continue in 2001.
COST OF SERVICE REVENUES. Our cost of service revenues was $4.0 million for
2001 and $3.6 million for 2000, representing an increase of 11%. This increase
was primarily due to the higher technical support revenues experienced in 2001.
As a percentage of service revenues, cost of service revenues were 45% for 2001
and 47% for 2000. 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. Our sales and marketing expenses were $14.4 million for
2001 and $22.8 million for 2000, representing a decrease of 37%. This decrease
was primarily due to a general reduction in marketing programs, a reduction in
staff and lower commissions based on lower sales revenues. Sales and marketing
expenses represented 74% of total revenues for 2001 and 90% of total revenues
for 2000.
RESEARCH AND DEVELOPMENT. Our research and development expenses were $5.6
million for 2001 and $8.1 million for 2000, representing a decrease of 31%. This
decrease was primarily related to a reduction in staff and a reduction in the
use of external consultants. Research and development expenses represented 29%
of total revenues for 2001 and 32% of total revenues for 2000.
GENERAL AND ADMINISTRATIVE. general and administrative expenses were $5.5
million for 2001 and $5.4 million for 2000, representing an increase of 2%. This
increase was primarily the result of patent litigation and settlement costs,
offset by a reduction in personnel expenses. General and administrative expenses
represented 29% of total revenues for 2001 and 21% of total revenues for 2000.
AMORTIZATION AND WRITE-DOWN OF PURCHASED INTANGIBLES. Amortization of
purchased intangibles was $3.6 million for 2001 and $2.9 million for 2000
representing an increase of 24%. The increase in amortization was primarily due
to write-off of intangibles and goodwill of $2.0 million in June 2001.
RESTRUCTURING COSTS. We restructured several operational functions during
2001. This resulted in a one-time charge of $1.7 million. The majority of this
charge related to severance and other employee related benefit costs.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense)
consists primarily of earnings on our cash, cash equivalents and short-term
investment balances, offset by interest expense related to obligations under
capital leases and other borrowings, and various miscellaneous state and foreign
taxes, and other expenses. Interest and other income (expense) was $259,000 for
2001 and $1.1 million for 2000, representing a decrease of 76%. This decrease
was primarily due to a reduction in our short-term investment balances and a
general reduction in market interest rates.
19
STOCK-BASED COMPENSATION. Some options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value of
the stock price for accounting purposes was greater than the fair market value
of the stock as determined by the Board of Directors on the date of grant or
issuance. Total deferred stock compensation associated with equity transactions
as of December 31, 2001 was $119,000, net of amortization. Deferred stock
compensation is being amortized ratably over the vesting periods of these
securities. Amortization expense, which is included in operating expenses, was
$245,000 in 2001 and $416,000 in 2000.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated statement of
operations data for each of the twelve quarters in the three-year period ended
December 31, 2002. This financial data is also expressed as a percentage of our
total revenues for the periods indicated. This data has been derived from our
unaudited consolidated financial statements, which have been prepared on the
same basis as the audited consolidated financial statements and, in the opinion
of our management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information when read in
conjunction with the consolidated financial statements and notes thereto. Our
quarterly results have been in the past, and may be in the future, subject to
significant fluctuations. As a result, we believe that results of operations for
interim periods should not be relied upon as any indication of the results to be
expected in any future period.
20
QUARTER ENDED
--------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
2000 2000 2000 2000 2001 2001
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License ............................. $ 2,881 $ 4,402 $ 5,356 $ 5,045 $ 2,131 $ 2,538
Service ............................. 1,329 1,556 1,728 2,980 2,735 2,213
----------- ----------- ----------- ----------- ----------- -----------
Total revenues .................... 4,210 5,958 7,084 8,025 4,866 4,751
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
License ............................. 50 16 207 31 5 1
Service ............................. 715 902 857 1,118 1,173 1,189
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues ............ 765 918 1,064 1,149 1,178 1,190
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ......................... 3,445 5,040 6,020 6,876 3,688 3,561
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ................. 5,998 5,255 5,234 6,268 4,349 3,819
Research and development ............ 2,013 2,213 2,042 1,859 1,748 1,583
General and administrative .......... 867 1,492 1,649 1,423 1,374 1,394
Amortization of purchased
intangibles ....................... 496 771 799 859 718 2,458
Restructuring costs ................. -- -- -- -- 785 688
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 9,374 9,731 9,724 10,409 8,974 9,942
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations ........ (5,929) (4,691) (3,704) (3,533) (5,286) (6,381)
Interest income (expense), net ....... 367 290 299 175 177 97
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................... $ (5,562) $ (4,401) $ (3,405) $ (3,358) $ (5,109) $ (6,284)
=========== =========== =========== =========== =========== ===========
Shares used in calculating
basic net income (loss)
per share ........................... 18,968 19,148 19,418 19,667 19,791 19,916
=========== =========== =========== =========== =========== ===========
Shares used in calculating
diluted net income (loss)
per share ........................... 18,968 19,148 19,418 19,667 19,791 19,916
=========== =========== =========== =========== =========== ===========
Basic net income (loss) per share .... $ (0.29) $ (0.23) $ (0.18) $ (0.17) $ (0.26) $ (0.32)
=========== =========== =========== =========== =========== ===========
Diluted net income (loss) per share .. $ (0.29) $ (0.23) $ (0.18) $ (0.17) $ (0.26) $ (0.32)
=========== =========== =========== =========== =========== ===========
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License ............................. 68.4% 73.9% 75.6% 62.9% 43.8% 53.4%
Service ............................. 31.6 26.1 24.4 37.1 56.2 46.6
----------- ----------- ----------- ----------- ----------- -----------
Total revenues .................... 100.0 100.0 100.0 100.0 100.0% 100.0%
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
License ............................. 1.2 0.3 2.9 0.4 0.1 0.0
Service ............................. 17.0 15.1 12.1 13.9 24.1 25.0
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues ............ 18.2 15.4 15.0 14.3 24.2 25.0
----------- ----------- ----------- ----------- ----------- -----------
Gross margin ......................... 81.8 84.6 85.0 85.7 75.8 75.0
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ................. 142.5 88.2 73.9 78.1 89.4 80.4
Research and development ............ 47.8 37.1 28.8 23.2 35.9 33.3
General and administrative .......... 20.6 25.0 23.3 17.7 28.2 29.3
Amortization of purchased
intangibles ....................... 11.8 12.9 11.3 10.7 14.8 51.7
Restructuring costs ................. -- -- -- -- 16.1 14.5
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 222.7 163.3 137.3 129.7 184.4 209.3
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations ........ (140.8) (78.7) (52.3) (44.0) (108.6) (134.3)
Interest income (expense) net ........ 8.7 4.9 4.2 2.2 3.6 2.0
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................... (132.4)% (73.9)% (48.1)% (41.8)% (105.0)% (132.3)%
=========== =========== =========== =========== =========== ===========
Table continued on next page
21a
table continued from above page
QUARTER ENDED
--------------------------------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
2001 2001 2002 2002 2002 2002
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License ............................. $ 3,114 $ 2,778 $ 833 $ 4,104 $ 2,825 $ 1,299
Service ............................. 2,056 1,806 1,328 1,626 1,319 1,252
----------- ----------- ----------- ----------- ----------- -----------
Total revenues .................... 5,170 4,584 2,161 5,730 4,144 2,551
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
License ............................. 1 7 27 75 75 109
Service ............................. 975 636 768 759 691 522
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues ............ 976 643 795 834 766 631
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ......................... 4,194 3,941 1,366 4,896 3,378 1,920
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ................. 3,739 2,464 2,434 2,586 1,848 1,807
Research and development ............ 1,229 1,018 1,118 1,038 1,040 912
General and administrative .......... 1,464 1,287 927 919 798 815
Amortization of purchased
intangibles ....................... 245 213 212 142 126 289
Restructuring costs ................. 200 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 6,877 4,982 4,691 4,685 3,812 3,823
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations ........ (2,683) (1,041) (3,325) 211 (434) (1,903)
Interest income (expense), net ....... 14 (29) 16 4 (15) 6
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................... $ (2,669) $ (1,070) $ (3,309) $ 215 $ (449) $ (1,897)
=========== =========== =========== =========== =========== ===========
Shares used in calculating
basic net income (loss)
per share ........................... 19,971 20,012 20,089 20,153 20,201 21,677
=========== =========== =========== =========== =========== ===========
Shares used in calculating
diluted net income (loss)
per share ........................... 19,971 20,012 20,089 20,486 20,201 21,677
=========== =========== =========== =========== =========== ===========
Basic net income (loss) per share .... $ (0.13) $ (0.05) $ (0.16) $ 0.01 $ (0.02) $ (0.09)
=========== =========== =========== =========== =========== ===========
Diluted net income (loss) per share .. $ (0.13) $ (0.05) $ (0.16) $ 0.01 $ (0.02) $ (0.09)
=========== =========== =========== =========== =========== ===========
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License ............................. 60.2% 60.6% 38.5% 71.6% 68.2% 50.9%
Service ............................. 39.8 39.4 61.5 28.4 31.8 49.1
----------- ----------- ----------- ----------- ----------- -----------
Total revenues .................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
License ............................. 0.0 0.1 1.2 1.3 1.8 4.3
Service ............................. 18.9 13.9 35.5 13.2 16.7 20.5
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues ............ 18.9 14.0 36.7 14.5 18.5 24.8
----------- ----------- ----------- ----------- ----------- -----------
Gross margin ......................... 81.1 86.0 63.3 85.5 81.5 75.2
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ................. 72.3 53.8 112.6 45.1 44.6 70.8
Research and development ............ 23.8 22.2 51.7 18.1 25.1 35.8
General and administrative .......... 28.3 28.1 42.9 16.0 19.3 31.9
Amortization of purchased
intangibles ....................... 4.7 4.6 9.8 2.5 3.0 11.3
Restructuring costs ................. 3.9 0.0 0.0 0.0 0.0 0.0
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 133.0 108.7 217.0 81.7 92.0 149.8
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations ........ (51.9) (22.7) (153.7) 3.8 (10.5) (74.6)
Interest income (expense) net ........ 0.2 (0.6) 0.7 0.1 (0.4) 0.2
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................... (51.7)% (23.3)% (153.0)% 3.9% (10.9)% (74.4)%
=========== =========== =========== =========== =========== ===========
21b
Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate significantly in the future, as a result of a
number of factors, many of which are outside our control. These factors include:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o shifts in demand for and market acceptance among our various products,
including our newer products, EDGEXTEND and DIRECTALERT, and our older
POWERTIER product;
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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through the sale of
unregistered common stock in the amount of $2.0 million in November 2002, 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 a third equipment related loan in the amount
of $149,000, and capitalized leases. As of December 31, 2002, we had $8.9
million of cash and cash equivalents and $4.9 million of working capital.
Net cash provided by operating activities was $113,000 for 2002. In 2001 and
2000, cash used in operating activities was $11.6 million and $11.7 million
respectively. For 2002, cash provided by operating activities was primarily
attributable to a decrease in accounts receivable and increases in deferred
revenues and other accrued liabilities. This provision of operating cash was
offset primarily by net losses and a decrease in accounts payable. For each of
2001 and 2000, cash used for operating activities was attributable primarily to
net operating losses. These losses were offset in part by depreciation and
amortization expenses.
22
Net cash used in investing activities was $325,000 for 2002. Net cash
provided by investing activities was $5.4 million for 2001, and net cash used in
investing activities was $108,000 for 2000. For 2002, cash used in investing
activities was primarily attributable to the purchase of property and equipment
and the acquisition of purchased intangibles. For 2001, cash provided by
investing activities consisted primarily of the sale of short-term investments.
For 2000, cash used in investing activities consisted of purchases of property
and equipment and purchased intangibles, offset by the sale of short-term
investments.
Net cash provided by financing activities was $1.7 million for 2002. Net
cash used in financing activities was $500,000 for 2001. Net cash provided by
financing activities was $3.6 million for 2000. Net cash provided by financing
activities during 2002 consisted primarily of the sale of unregistered common
stock and stock warrants to an investor offset by repayments under loan
agreements. Net cash used in financing activities during 2001 consisted
primarily of repayments of capital leases and loan agreements offset by the sale
of common stock. Net cash provided by financing activities during 2000 was
primarily attributable to the sale of common stock. For 2001 and 2000, net cash
was also provided from borrowings under an equipment financing facility, offset
by repayments of loan agreements.
We have credit facilities with Comerica Bank. Under those credit facilities,
we had a $5.0 million revolving line of credit facility at December 31, 2002
that was renegotiated in the amount of $2.5 million in March 2003 and is
available until April 30, 2004 (refer to Note 11 of the "Notes to Consolidated
Financial Statements" included elsewhere in this report). We also have a
$655,000 equipment term loan, and a $149,000 equipment term loan. As of December
31, 2002 we had no borrowings outstanding under the revolving line of credit
facility. As of December 31, 2002 we had $240,000 outstanding under the $655,000
equipment term loan. We are required to make principal payments of $21,843 per
month, plus interest at the bank's base rate plus 0.5% per annum payable in 30
monthly installments. As of December 31, 2002 we had $149,000 outstanding under
an equipment facility. Under this facility, borrowings outstanding of $149,000
as of January 3, 2003 converted to an 18 month term loan with principal payments
of $8,284 per month beginning on February 1, 2003 plus interest at the bank's
base rate plus 1% per annum. The bank's credit facilities required that as of
December 31, 2002 we, among other things, maintain a minimum tangible net worth
of $5.5 million and a minimum quick ratio (current assets not including
inventory less current liabilities) of 2 to 1. As of December 31, 2002, our
tangible net worth fell below the minimum tangible net worth ratio then in
effect, and the bank waived the event. In March 2003, we renegotiated our
revolving credit facility and a new covenant structure is in place. The bank's
renewed credit facilities require that Company, among other things, to maintain
certain working capital, tangible net worth and profitability covenants. We
expect to meet these covenants. Borrowings under the facilities are
collateralized by substantially all of our assets.
Currently we have no material commitments for capital expenditures nor do we
anticipate a material increase in capital expenditures and lease commitments.
We are currently targeting that our current cash and cash equivalents will
be sufficient to meet our anticipated cash needs through at least December 31,
2003, provided that we meet our targets with respect to revenues and accounts
receivable collections.
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 jeopardized.
23
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 did not carry any goodwill or intangible assets.
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 requires that one accounting
model be used for long-lived assets to be disposed of by sale whether previously
held and used or newly acquired, and broadened the presentation of discontinued
operations to include more disposal transactions. The Company adopted the
provisions of SFAS No. 144 as of January 1, 2002. Adoption of 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 Emerging Issues Task Force Issue No. 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 our
commitment to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. This statement is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 is expected to impact the timing of
recognition and the amount of future restructuring activities.
In December 2002, the FASB issued SFAS No. 148 ACCOUNTING FOR STOCK-BASED
COMPENSATION, TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123.
SFAS No. 148 provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects of reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this statement amends APB Opinion No. 28, INTERIM
FINANCIAL REPORTING, to require disclosure about those effects in interim
financial information. The amendments to SFAS No. 123, which provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation is
effective for financial statements for fiscal years ending after December 15,
2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to
Opinion 28 is effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. Management
does not intend to adopt the fair value accounting provisions of SFAS No. 123
and currently believes that the adoption of SFAS No. 148 will not have a
material impact on our financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING FOR DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO.
5, 57 AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34, DISCLOSURE OF
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. It also requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This interpretation also incorporates
without reconsideration the guidance in FASB Interpretation No. 34, which is
being superseded. The adoption of FIN 45 will not have a material effect on our
consolidated financial statements and will be applied prospectively.
24
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the other
information contained in this annual report on Form 10-K. The risks and
uncertainties described below are intended to be the ones that are specific to
our company or industry and that we deem to be material, but are not the only
ones that we face.
WE HAVE A LIMITED OPERATING HISTORY IN THE DATA SERVICES MARKETS.
Because we only commenced selling EDGEXTEND and DIRECTALERT in 2002, we have
a limited operating history in the data services 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, DIRECTALERT and EDGEXTEND;
o our dependence for revenue from our POWERTIER product, which was first
introduced in 1997 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, independent software vendors
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 in 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 $5.4 million in 2002, $15.1
million in 2001 and $16.7 million in 2000. As of December 31, 2002, we had an
accumulated deficit of $61.4 million. While we are currently targeting decreases
in sales and marketing, research and development, and general and administrative
expenses for 2003, as compared to the levels of those expenses in 2002, we will
still need to achieve our revenue targets in order to preserve cash. 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
ending December 31, 2003.
25
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE.
We are currently targeting that our current cash and cash equivalents will
be sufficient to meet our anticipated cash needs through at least December 31,
2003 provided that we meet our targets with respect to revenues and accounts
receivable collections.
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 jeopardized.
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 our newer products, EDGEXTEND and DIRECTALERT, and our older
POWERTIER product;
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.
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.
26
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 year ended December 31,
2002, sales to our top five customers accounted for 55% of total revenues. Sales
to Cablevision accounted for 26% of total revenues and sales to Salomon Smith
Barney accounted for 13% of total revenues. In the year ended December 31, 2001,
sales to our top five customers accounted for 45% of total revenues. Sales to
Salomon Smith Barney accounted for 15% of total revenues and sales to
Cablevision accounted for 11% of total revenues. In year ended December 31,
2000, sales to Salomon Smith Barney accounted for 16% of total revenues and
sales to our top five customers accounted for 40% of total revenues. 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.
BECAUSE OUR PRODUCTS PROVIDE ADDITIONAL FEATURES TO SUCCESSFUL APPLICATION
SERVER PRODUCTS FROM IBM AND BEA, THEY MAY ADD THESE FEATURES TO A FUTURE
VERSION OF THEIR PRODUCT, REDUCING THE NEED FOR OUR PRODUCTS.
Because IBM and BEA control the development schedule and feature set of
their products, we need to maintain a good working relationship with IBM and BEA
if we decide to develop future versions of EDGEXTEND for those new versions of
WebSphere and WebLogic. Failure to develop future versions compatible with the
27
latest versions from IBM and BEA could greatly reduce market acceptance for our
products. IBM or BEA could add features to their products, which would reduce or
eliminate the need for our products, which could harm our business. They could
develop their products in a more proprietary way to favor their own products, or
as those offered by a third party, which could make it much harder for us to
compete in the J2EE software market.
WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD
AND THE JAVA 2 ENTERPRISE EDITION (J2EE) STANDARD AND DISTRIBUTED OBJECT
COMPUTING, AND IF THESE TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD
SUFFER.
We are focusing our marketing efforts on our EDGEXTEND products, which are
based on three 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. Distributed
object computing combines the use of software modules, or objects, communicating
across a computer network to software applications, such as our EDGEXTEND
products. Our products depend upon and conform to the EJB standard. Sun
Microsystems released the EJB standard in 1998, and thus far EJB has had limited
market acceptance. EJB is a part of the J2EE standard; J2EE is the Java
programming standard for use in an application server. Since most of our
products depend upon the specialized J2EE and EJB standards, 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 and EJB 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 EDGEXTEND designed to
support these new specifications to remain competitive. If IBM or BEA introduce
new versions of WebSphere and WebLogic, we may need to introduce new versions of
EDGEXTEND designed to support these new versions. 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, our
EDGEXTEND for WebLogic product was released in August 2002 and our EDGEXTEND for
..NET product was released in October 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.
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 and we may not be able to hire enough qualified individuals in the
future. As a result of our 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.
28
BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES
CHANNEL THROUGH INDEPENDENT SOFTWARE VENDORS, SYSTEMS INTEGRATORS, 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 independent software
vendors, system integrators, 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, independent software
vendors, system integrators 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, independent software vendors, system integrator 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 as we decide to develop future
versions of EDGEXTEND, 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 own products, or a third party, which could make it much harder
for us to compete in the J2EE software market.
MICROSOFT HAS ESTABLISHED A COMPETING APPLICATION SERVER STANDARD, WHICH COULD
DIMINISH THE MARKET POTENTIAL FOR OUR PRODUCTS IF IT GAINS WIDESPREAD
ACCEPTANCE.
Our primary success has come in the J2EE market. Microsoft has established a
competing standard for distributed computing, .NET. Our .NET products are new
and unproven in the marketplace. If this standard gains widespread market
acceptance over the J2EE or CORBA standards, our business could 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.
29
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;
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.
In the EDGEXTEND market, alternative technology is available from a variety
of sources. Companies such as Versant, Gemstone 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.
We continue to sell current and earlier versions of POWERTIER for J2EE
application server to current customers. Our competitors for POWERTIER include
both publicly and privately-held enterprises, including BEA Systems (WebLogic),
IBM (WebSphere), Oracle (OAS), Secant Technologies and Sun Microsystems (Sun ONE
Application Server). Many customers may not be willing to purchase our POWERTIER
products because they have already invested heavily in databases and other
enterprise software components offered by these competing companies. Many of
these competitors have pre-existing customer relationships, longer operating
histories, greater financial, technical, marketing and other resources, greater
name recognition and larger installed bases of customers than we do.
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.
30
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, in particularly
because we must achieve our revenue and product development goals using both
fewer people and less money. Our ability to manage our resources effectively
will require us to continue to improve our sales process and to train, motivate
and manage our employees. If we are unable to manage our business effectively
within our current budget, 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 44% of our total revenues
came from sales of products and services outside of the United States for the
three months ended December 31, 2002, and approximately 33% of our total
revenues came from sales of products and services outside of the United States
for the year ended December 31, 2002. We expect international revenues to
continue to represent a significant portion of our total revenues. To date,
almost all of our international revenues have resulted from our direct sales
efforts. In international markets, however, we expect that we will depend more
heavily on third party distributors to sell our products in the future. The
success of our international strategy will depend on our ability to develop and
maintain productive relationships with these third parties. The failure to
develop key international markets for our products could cause a reduction in
our revenues. Additional risks related to our international expansion and
operation include:
o difficulties of staffing, funding and managing foreign operations;
31
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, acts of war, 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.
32
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our current stockholders sell substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market, the market price of our common stock could fall. In
addition, these sales of common stock could impede our ability to raise funds at
an advantageous price, or at all, through the sale of securities. As of December
31, 2002, we had approximately 23,989,958 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. On November 2002, we sold 3,758,692
shares of common stock at a purchase price of $0.5321 per share, for an
aggregate sale price of $2,000,000, and warrants to purchase up to 1,205,130
shares common stock at an exercise price of $0.75 per share to certain
purchasers affiliated with Needham Capital Partners. In connection with this
financing, we agreed to file a registration statement with the SEC covering the
resale of these shares (including the shares issuable on exercise of the
warrants) on the earlier of (i) 30 days after the date of this Annual Report on
Form 10-K or (ii) April 30, 2003. We also agreed to file an additional
registration statement on the request of the purchasers under certain
circumstances. When the SEC declares this S-3 registration statement effective,
the Needham affiliated purchasers will be able to freely trade these shares in
the public market, subject to certain restrictions as a result of their status
as an affiliate, which could result in a decrease in the price of our stock.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, AND WE HAVE RECEIVED
A NOTICE FROM NASDAQ REGARDING THE POSSIBLE DELISTING OF OUR STOCK FROM THE
NASDAQ SMALLCAP MARKET.
Our common stock price has been and may continue to be highly volatile, and
we expect that the market price of our common stock will continue to be subject
to significant fluctuations, as a result of variations in our quarterly
operating results and the overall volatility of the Nasdaq SmallCap Market.
These fluctuations have been, and may continue to be, exaggerated because an
active trading market has not developed for our stock. Thus, investors may have
difficulty selling shares of our common stock at a desirable price, or at all.
Furthermore, we have received a notice from the Nasdaq SmallCap Market that if
our stock does not meet the minimum $1.00 per share minimum requirement for a
10-day period by June 2, 2003, our stock may be delisted from the Nasdaq
SmallCap Market. If we cannot achieve compliance we expect to receive a formal
delisting notice from the Nasdaq SmallCap Market. We currently intend to seek a
Nasdaq hearing for appeal if and when we receive such notice of delisting. The
maintenance of our Nasdaq SmallCap Market listing is very important to us. We
intend to take appropriate actions, as necessary, including possibly seeking
shareholder approval for a reverse stock split in order to maintain our Nasdaq
SmallCap Market listing. If our efforts in this regard are unsuccessful, our
stock would trade on the OTC "bulletin board". Delisting from the Nasdaq
SmallCap Market could negatively impact our reputation and consequently our
business.
In addition, the market price of our common stock may rise or fall in the
future as a result of many factors, such as:
o variations in our quarterly results;
o announcements of technology innovations by us or our competitors;
o introductions of new products by us or our competitors;
o acquisitions or strategic alliances by us or our competitors;
o hiring or departure of key personnel;
o the gain or loss of a significant customer or order;
o changes in estimates of our financial performance or changes in
recommendations by securities analysts;
o market conditions and expectations regarding capital spending in the
software industry and in our customers' industries; and
o adoption of new accounting standards affecting the software industry.
33
The market prices of the common stock of many companies in the software and
Internet industries have experienced extreme price and volume fluctuations,
which have often been unrelated to these companies' operating performance. In
the past, securities class action litigation has often been brought against a
company after a period of volatility in the market price of its stock. We may in
the future be a target of similar litigation. Securities litigation could result
in substantial costs and divert management's attention and resources, which
could harm our business.
THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER.
Provisions in our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
o establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
o authorizing the board to issue preferred stock;
o prohibiting cumulative voting in the election of directors;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent; and
o establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE
OUR STOCKHOLDERS.
As part of our business strategy, we expect to review acquisition prospects
that we believe would be advantageous to the development of our business. While
we have no current agreements or negotiations underway with respect to any major
acquisitions of third-party technology, we may make acquisitions of businesses,
products or technologies in the future. If we make any acquisitions, we could
take any or all of the following actions, any of which could materially and
adversely affect our financial results and the price of our common stock:
o issue equity securities that would dilute existing stockholders'
percentage ownership;
o incur substantial debt;
o assume contingent liabilities; or
o take substantial charges in connection with the impairment of goodwill
and amortization of other intangible assets.
Acquisitions also entail numerous risks, including:
o difficulties in assimilating acquired operations, products and personnel
with our pre-existing business;
o unanticipated costs;
o diversion of management's attention from other business concerns;
o adverse effects on existing business relationships with suppliers and
customers;
o risks of entering markets in which we have limited or no prior
experience; and
34
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.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY. Our operating results are sensitive to changes in
the general level of U.S. interest rates. If market interest rates had changed
by ten percent in 2002, our operating results would not have changed materially.
As of December 31, 2002, most of our cash equivalents were invested in money
market accounts and, thus, the principal values are not susceptible to changes
in short-term interest rates.
FOREIGN CURRENCY FLUCTUATIONS. We have certain operating transactions in
foreign currencies, and maintain balances that are due or payable in foreign
currencies at December 31, 2002. We estimate that a hypothetical ten percent
change in foreign currency rates in 2002 would not have impacted our financial
results of operations materially. We do not hedge any of our foreign currency
exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the consolidated financial statements and
supplementary data that are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
35
PART III
ITEMS 10, 11, 12 AND 13.
The Company's Proxy Statement for its Annual Meeting of Stockholders for the
year ended December 31, 2002, when filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, will be incorporated by reference in this Form
10-K pursuant to General Instruction G(3) of Form 10-K and will provide the
information required under Part III (Items 10-13), except for the information
with respect to the Company's executive officers, which is included in "Item 1.
Business -- Executive Officers."
ITEM 14. 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 on
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 our evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this annual report:
(1) FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT (pages F-1
through F-18):
Audited Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 2002, 2001
and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULE (pages S-1 through S-3)
Audited Consolidated Financial Statement Schedule:
Independent Auditors' Report
Schedule II -- Consolidated Schedule of Valuation and Qualifying
Accounts for the years ended December 31, 2002, 2001 and 2000
36
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
(b) Reports on Form 8-K. One report on Form 8-K was filed on November 27, 2002
during the quarter ended December 31, 2002 reporting matters under Item 5.
Other Events, and Item 7, Financial Statements Pro Forma Financial
Information and Exhibits.
37
CERTIFICATIONS
I, Christopher T. Keene, Chief Executive Officer of the registrant, certify
that:
1. I have reviewed this annual report on Form 10-K of Persistence Software,
Inc.;
2. Based on my knowledge, this annual 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 annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 28, 2003
/s/ CHRISTOPHER T. KEENE
----------------------------
Christopher T. Keene
Chief Executive Officer
38
CERTIFICATIONS
I, Christine Russell, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this annual report on Form 10-K of Persistence Software,
Inc.;
2. Based on my knowledge, this annual 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 annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 28, 2003
/s/ CHRISTINE RUSSELL
-------------------------
Christine Russell
Chief Financial Officer
39
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.2* Amended and Restated Certificate of Incorporation of Persistence.
3.4 Amended and Restated Bylaws of Persistence, as amended on
February 12, 2003
4.1* Specimen Stock Certificate.
4.2*** Common stock warrant, warrant No. W-CS1, dated June 28, 2001,
issued to RCG Capital Markets Group, Inc.
10.1* Form of Common Stock Purchase Agreement between Persistence and
each of Christopher T. Keene and Derek P. Henninger.
10.2* Fifth Amended and Restated Investor Rights Agreement dated
February 19, 1999 among Persistence and certain investors.
10.4* Form of Change of Control Agreement between Persistence and
Christine Russell.
10.5* 1994 Stock Purchase Plan (as amended) and Form of Common Stock
Purchase Agreement.
10.6 1997 Stock Plan (as amended) and Forms of Stock Option Agreement
and Common Stock Purchase Agreement.
10.7 1999 Employee Stock Purchase Plan and Form of Subscription
Agreement.
10.8 1999 Directors' Stock Option Plan and Form of Option Agreement.
10.9* Lease dated June 12, 1991 between Persistence and Great American
Bank (as amended).
10.10*+ Settlement and License Agreement dated March 23, 1998 between
Persistence and Sun Microsystems, Inc.
10.11* Form of Indemnification Agreement between Persistence and
officers and directors.
10.12*** Registration Rights Agreement dated as of June 28, 2001 between
Persistence and RCG Capital Markets Group, Inc.
10.13***** Amended and Restated Loan Agreement between Persistence and
Comerica Bank dated March 6, 2002.
10.14***** Lease Amendment dated February 5, 2002 between Persistence and
Cornerstone Properties I, LLC.
10.15***** Form of Change of Control Agreement between Persistence and each
of Keith Zaky and Ed Murrer.
10.17**** Second Amendment to the Restated Loan and Security Agreement
between Persistence and Comerica Bank dated July 3, 2002.
10.18**** Third Amendment to the Restated Loan and Security Agreement
between Persistence and Comerica Bank dated July 17, 2002.
10.19** Common Stock Purchase Agreement dated as of November 26, 2002 by
and between Persistence Software, Inc. and Needham Capital
Partners III, L.P., Needham Capital Partners IIIA, L.P. and
Needham Capital Partners III (Bermuda), L.P.
10.20** Registration Rights Agreement dated as of November 26, 2002 by
and between Persistence Software, Inc. and Needham Capital
Partners III, L.P., Needham Capital Partners IIIA, L.P. and
Needham Capital Partners III (Bermuda), L.P.
10.21** Voting Agreement dated as of November 26, 2002 by and between
Persistence Software, Inc., Christopher T. Keene and Needham
Capital Partners III, L.P., Needham Capital Partners IIIA, L.P.
and Needham Capital Partners III (Bermuda), L.P.
10.22** Form of Common Stock Warrant dated as of November 26, 2002 issued
to Needham Capital Partners III, L.P., Needham Capital Partners
IIIA, L.P. and Needham Capital Partners III (Bermuda), L.P.
10.23 Fourth Amendment to the Restated Loan and Security Agreement
between Persistence and Comerica Bank dated November 15, 2002.
10.24 Amended and Restated Loan Agreement between Persistence and
Comerica Bank dated March 20, 2003.
21.1* List of subsidiaries.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney (see page 42).
99.1 Certificate pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certificate pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
__________
40
* Incorporated herein by reference to our Registration Statement on Form S-1
(Commission File No. 333-76867).
** Incorporated herein by reference to our Current Report on Form 8-K filed
on November 27, 2002.
*** Incorporated herein by reference to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001.
**** Incorporated herein by reference to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002.
***** Incorporated herein by reference to our Annual Report on Form 10K for the
year ended December 31, 2001.
+ Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been granted with respect
to the omitted portions.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K for the fiscal year ended December 31, 2002 to be signed on its behalf by
the undersigned, thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ CHRISTOPHER T. KEENE
---------------------------------
Christopher T. Keene
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
By: /s/ CHRISTINE RUSSELL
---------------------------------
Christine Russell
CHIEF FINANCIAL OFFICER
(Principal Financial and
Accounting Officer)
Date: March 28, 2003
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Christine Russell his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorney-in-fact, or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CHRISTOPHER T. KEENE Chairman of the Board and Chief Executive March 25, 2003
- -------------------------------- Officer (Principal Executive Officer)
Christopher T. Keene
/s/ CHRISTINE RUSSELL Chief Financial Officer (Principal March 25, 2003
- -------------------------------- Financial and Accounting Officer)
Christine Russell
/s/ OWEN BROWN Director March 25, 2003
- --------------------------------
Owen Brown
/s/ ALAN KING Director March 25, 2003
- --------------------------------
Alan King
/s/ CHRISTOPHER PAISLEY Director March 25, 2003
- --------------------------------
Christopher Paisley
/s/ THOMAS SHANAHAN Director March 25, 2003
- --------------------------------
Thomas Shanahan
/s/ SANJAY VASWANI Director March 25, 2003
- --------------------------------
Sanjay Vaswani
42
PERSISTENCE SOFTWARE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Audited Consolidated Financial Statements:
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets at December 31, 2002 and 2001................. F-3
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000....................................... F-4
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 2002,
2001 and 2000.......................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000....................................... F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Persistence Software, Inc.:
We have audited the accompanying consolidated balance sheets of Persistence
Software, Inc. and its subsidiaries (the "Company") as of December 31, 2002 and
2001, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive loss, and cash flows for each of the
three years in the period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
2002 and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
January 24, 2003
(March 20, 2003 as to Note 11)
F-2
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
ASSETS
DECEMBER 31,
---------------------
2002 2001
--------- ---------
Current assets:
Cash and cash equivalents ........................................................... $ 8,903 $ 7,411
Accounts receivable, net of allowances of $220 and $152, respectively ............... 1,252 4,106
Prepaid expenses and other current assets ........................................... 392 656
--------- ---------
Total current assets ........................................................... 10,547 12,173
Property and equipment, net ........................................................... 375 796
Purchased intangibles, net of amortization of $785 and $1,088, respectively ........... 123 722
Other assets .......................................................................... 55 64
--------- ---------
Total assets ................................................................... $ 11,100 $ 13,755
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 325 $ 1,070
Accrued compensation and related benefits ........................................... 722 892
Other accrued liabilities ........................................................... 1,188 457
Deferred revenues, net of long-term portion ......................................... 2,529 2,124
Current portion of long-term obligations ............................................ 841 847
--------- ---------
Total current liabilities ...................................................... 5,605 5,390
Long-term liabilities
Long-term portion of deferred revenues .............................................. 691 --
Long-term obligations ............................................................... 93 421
--------- ---------
Total long-term liabilities .................................................... 784 421
--------- ---------
Total liabilities .............................................................. 6,389 5,811
--------- ---------
Commitments (Note 5)
Stockholders' equity:
Preferred stock, $0.001 par value; authorized-- 5,000,000 shares; designated and
outstanding--none .................................................................. -- --
Common stock, $0.001 par value; authorized -- 75,000,000 shares; outstanding -- 2002,
23,989,958 shares; 2001, 20,036,588 shares ......................................... 66,103 64,036
Deferred stock compensation ......................................................... (31) (119)
Notes receivable from stockholders .................................................. -- (54)
Accumulated deficit ................................................................. (61,370) (55,930)
Accumulated other comprehensive income .............................................. 9 11
--------- ---------
Total stockholders' equity ..................................................... 4,711 7,944
--------- ---------
Total liabilities and stockholders' equity ..................................... $ 11,100 $ 13,755
========= =========
See notes to consolidated financial statements.
F-3
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Revenues:
License ......................................................... $ 9,061 $ 10,561 $ 17,684
Service ......................................................... 5,525 8,810 7,593
--------- --------- ---------
Total revenues ............................................. 14,586 19,371 25,277
--------- --------- ---------
Cost of revenues:
License ......................................................... 286 14 304
Service ......................................................... 2,740 3,973 3,592
--------- --------- ---------
Total cost of revenues ..................................... 3,026 3,987 3,896
--------- --------- ---------
Gross profit ...................................................... 11,560 15,384 21,381
Operating expenses:
Sales and marketing ............................................. 8,676 14,371 22,755
Research and development ........................................ 4,108 5,578 8,127
General and administrative ...................................... 3,459 5,519 5,431
Amortization and write-down of purchased intangibles ............ 768 3,634 2,925
Restructuring costs ............................................. -- 1,673 --
--------- --------- ---------
Total operating expenses ................................... 17,011 30,775 39,238
--------- --------- ---------
Loss from operations .............................................. (5,451) (15,391) (17,857)
Interest and other income (expense):
Interest income ................................................. 94 394 1,401
Interest expense ................................................ (44) (68) (60)
Other, net ...................................................... (39) (67) (210)
--------- --------- ---------
Total interest and other income (expense) .................. 11 259 1,131
--------- --------- ---------
Net loss .......................................................... $ (5,440) $(15,132) $(16,726)
========= ========= =========
Basic and diluted net loss per share .............................. $ (0.26) $ (0.76) $ (0.87)
========= ========= =========
Shares used in calculating basic and diluted net loss per share ... 20,529 19,919 19,330
========= ========= =========
See notes to consolidated financial statements.
F-4
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK DEFERRED
----------------------------- ----------------------------- STOCK
SHARES AMOUNT SHARES AMOUNT COMPENSATION
------------- ------------- ------------- ------------- -------------
Balances, January 1, 2000 ......... -- $ -- 19,269,704 $ 57,467 $ (1,206)
Net loss ..........................
Change in unrealized gain on
investments .....................
Cumulative translation
adjustment ......................
Comprehensive loss ................
Issuance of common stock,
net of repurchases .............. 609,008 6,725
Collection of notes receivable
from stockholders ...............
Reversal of stock arrangements
due to cancellations ............ (198) 198
Amortization of deferred
stock compensation .............. 416
------------- ------------- ------------- ------------- -------------
Balances, December 31, 2000 ....... -- -- 19,878,712 63,994 (592)
Net loss ..........................
Cumulative translation
adjustment ......................
Comprehensive loss ................
Issuance of common stock, net of
repurchases ..................... 157,876 270
Collection of notes receivable
from stockholders ...............
Issuance of stock warrants ........ 53 (53)
Reversal of stock arrangements
due to cancellations ............ (281) 281
Amortization of deferred
stock compensation .............. 245
------------- ------------- ------------- ------------- -------------
Balances, December 31, 2001 ....... -- -- 20,036,588 64,036 (119)
Net loss ..........................
Cumulative translation
adjustment ......................
Comprehensive loss ................
Issuance of common stock and
common stock warrants, net
of repurchases .................. 3,953,370 2,025
Collection of notes receivable
from stockholders ...............
Issuance of stock options,
non-employees ................... 42
Amortization of deferred
stock compensation .............. 88
------------- ------------- ------------- ------------- -------------
Balances, December 31, 2002 ....... -- $ -- 23,989,958 $ 66,103 $ (31)
============= ============= ============= ============= =============
table continued on next page
F-5a
NOTES ACCUMULATED
RECEIVABLE OTHER TOTAL
FROM ACCUMULATED COMPREHENSIVE COMPREHENSIVE
STOCKHOLDERS DEFICIT (LOSS)INCOME TOTAL LOSS
------------- ------------- ------------- ------------- -------------
Balances, January 1, 2000 ......... $ (161) $ (24,072) $ (10) $ 32,018
Net loss .......................... (16,726) (16,726) $ (16,726)
Change in unrealized gain on
investments ..................... 10 10 10
Cumulative translation
adjustment ...................... 46 46 46
-------------
Comprehensive loss ................ $ (16,670)
=============
Issuance of common stock,
net of repurchases .............. 6,725
Collection of notes receivable
from stockholders ............... 67 67
Reversal of stock arrangements
due to cancellations ............
Amortization of deferred
stock compensation .............. 416
------------- ------------- ------------- -------------
Balances, December 31, 2000 ....... (94) (40,798) 46 22,556
Net loss .......................... (15,132) (15,132) $ (15,132)
Cumulative translation
adjustment ...................... (35) (35) (35)
-------------
Comprehensive loss ................ $ (15,167)
=============
Issuance of common stock, net of
repurchases ..................... 270
Collection of notes receivable
from stockholders ............... 40 40
Issuance of stock warrants ........
Reversal of stock arrangements
due to cancellations ............
Amortization of deferred
stock compensation .............. 245
------------- ------------- ------------- -------------
Balances, December 31, 2001 ....... (54) (55,930) 11 7,944
Net loss .......................... (5,440) (5,440) $ (5,440)
Cumulative translation
adjustment ...................... (2) (2) (2)
-------------
Comprehensive loss ................ $ (5,442)
=============
Issuance of common stock and
common stock warrants, net
of repurchases .................. 2,025
Collection of notes receivable
from stockholders ............... 54 54
Issuance of stock options,
non-employees ................... 42
Amortization of deferred
stock compensation .............. 88
------------- ------------- ------------- -------------
Balances, December 31, 2002 ....... $ -- $ (61,370) $ 9 $ 4,711
============= ============= ============= =============
See notes to consolidated financial statements.
F-5b
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................. $ (5,440) $(15,132) $(16,726)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Allowance for doubtful accounts ................................... 353 951 896
Depreciation and amortization ..................................... 1,198 2,275 3,842
Write-down of purchased intangibles ............................... 160 1,988 --
Loss on sale of fixed assets ...................................... 14 164 --
Amortization of deferred stock compensation ....................... 88 245 416
Issuance of warrants and options to non-employees ................. 42 -- --
Reserve for loss on lease liability ............................... 22 -- --
Changes in operating assets and liabilities:
Accounts receivable ............................................. 2,501 2,064 (2,332)
Prepaid expenses and other current assets ....................... 264 175 (265)
Accounts payable ................................................ (745) (587) 287
Accrued compensation and related benefits ....................... (171) (1,895) 983
Other accrued liabilities ....................................... 731 (1,274) 537
Deferred revenues ............................................... 1,096 (558) 667
--------- --------- ---------
Net cash provided by (used in) operating activities .......... 113 (11,584) (11,695)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments ......................... -- 5,387 1,965
Purchase of property and equipment ................................... (176) (101) (1,422)
Proceeds from sale of property and equipment ......................... -- 93 --
Acquisition of purchased intangibles ................................. (158) -- (619)
Deposits and other ................................................... 9 48 (32)
--------- --------- ---------
Net cash provided by (used) in investing activities .......... (325) 5,427 (108)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of repurchases and issuance costs .......... 2,025 270 3,465
Repurchase of common stock ........................................... -- -- (1)
Collection of notes receivable from stockholders ..................... 54 40 67
Repayment of capital lease obligations ............................... (33) (43) (77)
Repayment of obligations incurred to acquire purchased intangibles ... (160) (470) (160)
Borrowing under loan agreement ....................................... 149 122 533
Repayment under loan agreements ...................................... (329) (419) (267)
--------- --------- ---------
Net cash provided by (used) in financing activities .......... 1,706 (500) 3,560
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ........... (2) (35) 46
--------- --------- ---------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) .............................................. 1,492 (6,692) (8,197)
Beginning of year .................................................... 7,411 14,103 22,300
--------- --------- ---------
End of year .......................................................... $ 8,903 $ 7,411 $ 14,103
========= ========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment under capital leases ........... $ 18 $ -- $ 73
========= ========= =========
Long-term obligations incurred to acquire purchased intangibles ...... $ -- $ (150) $ 1,435
========= ========= =========
Release of compensatory stock arrangements ........................... $ -- $ 281 $ --
========= ========= =========
Compensatory stock arrangements ...................................... $ -- $ (53) $ --
========= ========= =========
Common stock issued for purchased intangibles ........................ $ -- $ -- $ 3,063
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --CASH
PAID DURING THE YEAR FOR:
Interest ............................................................. $ 44 $ 68 $ 60
========= ========= =========
Income taxes ......................................................... $ 34 $ 66 $ 132
========= ========= =========
See notes to consolidated financial statements.
F-6
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Persistence Software solves data access problems for distributed
and real-time systems. The Company's solutions help deliver better business
visibility for applications which require current information about customers,
products and suppliers.
The Company provides a suite of data management products that sit between
existing databases - such as Oracle and DB/2 - and application servers - such as
WebLogic and WebSphere. Developers can configure these products to structure and
position business information with optimal efficiency, improving application
server performance and simplifying application distribution while reducing
database costs.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
CASH EQUIVALENTS -- The Company considers all highly liquid debt instruments
purchased with remaining maturities of less than three months to be cash
equivalents.
PROPERTY AND EQUIPMENT are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of three
years. Leasehold improvements are amortized over the shorter of the lease term
or their useful life.
PURCHASED INTANGIBLES are stated at cost. Amortization is computed using the
straight-line method over the estimated useful lives of two to three years.
Purchased intangibles at December 31, 2002 were $123,000 net of amortization.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF --
The Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. In fiscal 2002, the
Company determined that certain intangible assets were impaired and, thus,
recorded a write-down of $160,000. In fiscal 2001, the Company determined that
certain intangible assets were impaired and, thus, recorded a write-down of $2.0
million. Refer to Note 2.
SOFTWARE DEVELOPMENT COSTS -- Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional costs would be capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, COMPUTER SOFTWARE TO BE SOLD,
LEASED OR OTHERWISE MARKETED. Because the Company believes its current process
for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
NOTES RECEIVABLE FROM STOCKHOLDERS -- The notes receivable from stockholders
were issued at market rates in exchange for common stock, bear interest at 5.93%
per annum, and were paid in full during fiscal 2002. The notes were
full-recourse.
REVENUE RECOGNITION -- Revenue consists primarily of fees for licenses of
the Company's software products, maintenance and customer support.
F-7
LICENSE REVENUE -- Revenue from software licenses is recognized upon
shipment of the software if collection of the resulting receivable is probable,
an executed agreement has been signed, the fee is fixed or determinable and
vendor-specific objective evidence exists to allocate a portion of the total fee
to any undelivered elements of the arrangement. Such undelivered elements in
these arrangements typically consist of services. For sales made through
distributors, revenue is recognized upon shipment. Distributors have no right of
return. Royalty revenues are recognized when the software or services has been
delivered, collection is reasonably assured and the fees are determinable.
SERVICE REVENUE -- Revenue from customer training, support and consulting
services is recognized as the services are performed. Support revenue is
recognized ratably over the term of the support contract until support revenue
is recognized it is included in "deferred revenue" on the accompanying
consolidated balance sheet. If support or professional services are included in
an arrangement that includes a license agreement, amounts related to support or
professional services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price when such elements are sold separately, or, when not sold
separately, the price established by management having the relevant authority.
Arrangements which require significant modification or customization of software
are recognized under the percentage of completion method.
INCOME TAXES -- Income taxes are provided using an asset and liability
approach which requires recognition of deferred tax liabilities and assets, net
of valuation allowances, for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities and net operating loss and tax credit carryforwards.
FOREIGN CURRENCY TRANSACTIONS -- The functional currencies of the Company's
foreign subsidiaries are the British Pound Sterling, Euro and the Hong Kong
Dollar. Accordingly, all monetary assets and liabilities are translated at the
current exchange rate at the end of the year, nonmonetary assets and liabilities
are translated at historical rates and net sales and expenses are translated at
average exchange rates in effect during the period. Translation gains and
losses, which are included in the balance sheets and in other comprehensive
income (loss) in the accompanying consolidated statements of changes in
stockholders' equity, have not been significant.
STOCK COMPENSATION -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
Accordingly, no accounting recognition is given to employee stock options
granted with an exercise price equal to fair market value of the underlying
stock on the grant date. Upon exercise, the net proceeds and any related tax
benefit are credited to stockholders' equity.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION as amended by SFAS 148
ACCOUNTING FOR STOCK-BASED COMPENSATION TRANSITION AND DISCLOSURE, requires the
disclosure of pro forma net loss as if the Company had adopted the fair value
method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions for options outstanding under
the 1997 Stock Plan: expected life, 30 months following vesting in 2002, 24
months following vesting in 2001 and 2000; risk free interest rate of 4.0% in
2002, 5.0% in 2001, 5.1% in 2000; volatility of 147% for 2002, 183% for 2001,
124% for 2000; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the awards granted
in 1997 and after had been amortized to expense over the vesting period of the
awards, pro forma net loss (net of amortization of deferred compensation expense
already recorded for the years ended December 31, 2002, 2001 and 2000, as
discussed above) would have been approximately as follows:
F-8
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Net loss applicable to common shareholders: .................
As reported ................................................. $ (5,440) $(15,132) $(16,726)
Stock-based employee compensation expense included in
reported loss ............................................. 88 245 416
Total stock-based employee compensation expense
determined under fair value based method for all awards .. (1,301) 3,785 (10,677)
--------- --------- ---------
Pro forma net loss .......................................... $ (6,653) $(11,102) $(26,987)
========= ========= =========
Basic and diluted net loss applicable to common
shareholders per share:
As reported ................................................. $ (0.26) $ (0.76) $ (0.87)
========= ========= =========
Pro forma ................................................... $ (0.33) $ (0.56) $ (1.40)
========= ========= =========
The pro-forma reduction in net loss for 2001 from the amount reported was
due to the cancellation of unvested options that had higher original exercise
prices than the repriced options granted later in the year. This issue is
further discussed in the "stock option repricing" section of Note 6.
The Company accounts for stock-based awards to consultants using the
multiple option method as described by FASB Interpretation No. 28. Stock-based
compensation expense is recognized as earned. At each reporting date, the
Company re-values the stock-based compensation using the Black-Scholes
option-pricing model. As a result, the stock-based compensation expense will
fluctuate as the fair market value of the Company's common stock fluctuates.
NET LOSS PER COMMON SHARE -- Basic net loss per common share is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period (excluding shares subject to repurchase). Diluted net loss per
common share was the same as basic net loss per common share for all periods
presented. This result is due to the exclusion of all potentially dilutive
securities, which are anti-dilutive because of the Company's net losses.
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, and trade receivables. The risk associated with cash and
cash equivalents is mitigated by using only high-quality financial institutions.
The Company primarily sells its products to companies in the United States and
Europe. The Company does not require collateral or other security to support
accounts receivable. To reduce credit risk, management performs ongoing credit
evaluations of its customers' financial condition. The Company maintains
allowances for potential credit losses.
FINANCIAL INSTRUMENTS -- The Company's financial instruments include cash
and cash equivalents, notes receivable from stockholders and long-term debt. At
December 31, 2002 and 2001, the fair value of these financial instruments
approximated their financial statement carrying amounts, because the financial
instruments are either short-term or reflect interest rates consistent with
market rates.
SIGNIFICANT ESTIMATES -- The preparation of financial statements in
conformity with accounting principles as generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. This includes our bad debt
policy which requires that we maintain a specific allowance for certain doubtful
accounts and a general allowance for the majority of the non-specifically
reserved accounts. Actual results could differ from these estimates.
CERTAIN RISKS AND UNCERTAINTIES -- The Company operates in the software
industry, and accordingly, can be affected by a variety of factors. For example,
management of the Company believes that changes in any of the following areas
could have a significant negative effect on the Company in terms of its future
financial position, results of operations and cash flows: ability to obtain
additional financing; regulatory changes; fundamental changes in the technology
underlying software products; market acceptance of the Company's products under
development; development of sales channels; loss of significant customers;
adverse changes in international market conditions; litigation or other claims
against the Company; the hiring, training and retention of key employees;
successful and timely completion of product development efforts; and new product
introductions by competitors.
F-9
The Company has incurred net losses each year since 1996 including losses of
$5.4 million in 2002, $15.1 million in 2001, and $16.7 million in 2000. As of
December 31, 2002, the Company had an accumulated deficit of $61.4 million. The
Company believes its cash and cash equivalents of $8.9 million are sufficient to
meet its anticipated cash needs for working capital and capital expenditures
through at least December 31, 2003. If cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, we may seek to
raise additional financing or reduce the scope of our planned product
development and marketing efforts.
COMPREHENSIVE (LOSS)/INCOME -- In 2002, the Company's comprehensive loss
included a cumulative translation adjustment of $2,000. In 2001, the Company's
comprehensive loss included a cumulative translation adjustment of $35,000 and
in 2000 the comprehensive income included an unrealized gain on investments of
$10,000 and a cumulative translation adjustment of $46,000.
SEGMENTS OF AN ENTERPRISE -- The Company currently operates in one
reportable segment and the chief operating decision maker is the Company's Chief
Executive Officer.
RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 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 the Company's financial statements as the Company did not carry any goodwill
or intangible assets.
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 requires that one accounting
model be used for long-lived assets to be disposed of by sale whether previously
held and used or newly acquired, and broadened the presentation of discontinued
operations to include more disposal transactions. The Company adopted the
provisions of SFAS No. 144 as of January 1, 2002. Adoption of 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 Emerging Issues Task Force Issue No. 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. This
statement is effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 is expected to impact the timing
of recognition and the amount of future restructuring activities.
In December 2002, the FASB issued SFAS No. 148 ACCOUNTING FOR STOCK-BASED
COMPENSATION, TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123.
SFAS No. 148 provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects of reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this statement amends APB Opinion No. 28, INTERIM
FINANCIAL REPORTING, to require disclosure about those effects in interim
financial information. The amendments to SFAS No. 123, which provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation is
effective for financial statements for fiscal years ending after December 15,
2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to
Opinion 28 is effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. Management
does not intend to adopt the fair value accounting provisions of SFAS No. 123
and currently believes that the adoption of SFAS No. 148 will not have a
material impact on our financial statements.
F-10
In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING FOR DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO.
5, 57 AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34, DISCLOSURE OF
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. It also requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This interpretation also incorporates
without reconsideration the guidance in FASB Interpretation No. 34, which is
being superseded. The adoption of FIN 45 will not have a material effect on our
consolidated financial statements and will be applied prospectively.
2. ASSET WRITE-DOWNS AND EMPLOYEE TERMINATION COSTS
During 2002, the Company recorded an impairment charge of $160,000 relating to
the Company's evaluation of certain purchased intangible assets. During 2001,
the Company recorded an impairment charge of $2.0 million relating to the
Company's evaluation of certain purchased intangible assets. These intangible
assets were written down to reflect the carrying value of these assets to their
net realizable values, which reflect the expected economic benefits to be
derived from the use of these assets.
During 2002, no restructuring costs were incurred. During 2001, the Company
adopted a plan to make organizational changes and reduce its work force. The
Company recorded and paid $1.7 million in charges for employee severance and
related operating expenses. This plan involved terminating 68 domestic
employees, of which 35 were in sales and marketing, 25 were in research and
development and 8 were in the general and administration functions. There were
no accrued and unpaid severance costs at December 31, 2001.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
----------------------
2002 2001
---------- ----------
(IN THOUSANDS)
Equipment............................................... $ 3,306 $ 3,189
Software................................................ 1,119 1,093
Leasehold improvements.................................. 177 177
---------- ----------
4,602 4,459
Accumulated depreciation and amortization............... (4,227) (3,663)
---------- ----------
$ 375 $ 796
========== ==========
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
DECEMBER 31,
----------------------
2002 2001
---------- ----------
(IN THOUSANDS)
Equipment term loan..................................... $ -- $ 67
Equipment term loan..................................... 240 502
Equipment term loan..................................... 149 --
Capital lease obligations (see Note 5).................. 28 44
Other long-term obligations............................. 517 655
---------- ----------
934 1,268
Less current portion.................................... (841) (847)
---------- ----------
$ 93 $ 421
========== ==========
F-11
Borrowings under the following facilities with a bank are collateralized by
substantially all of the Company's assets.
In November 2001, the Company renewed its credit facilities with the bank
for a $5 million revolving line of credit facility available through April 30,
2003. As of December 31, 2002, the Company had no borrowings outstanding under
the credit facility. Under this facility, any outstanding borrowings will bear
interest at the bank's prime rate (4.25 % at December 31, 2002) plus 0.5%. On
March 20, 2003, the Company renewed its credit facilities with the bank. Under
the renewed facilities the Company's revolving credit line has been reduced to
$2.5 million and is available through April 30, 2004. (Refer to Note 11 for
amendment.)
As of March 2002, the Company had paid in full $67,000 outstanding under its
$800,000 equipment term loan, which bore interest at 7.75%.
As of December 31, 2002, the Company had $240,000 outstanding under its
$655,000 equipment term loan with the bank. The Company is required to make
principal payments of $21,843 per month, plus interest, at the bank's base rate
(4.25% at December 31, 2002) plus 0.5% per annum, payable in monthly
installments through November 2003.
As of December 31, 2002, the Company had $149,000 outstanding under an
equipment term loan for the maximum principal amount of $250,000. Under this
facility borrowings outstanding on January 3, 2003 converted to an 18-month term
loan with principal payments of $8,284 per month beginning on February 1, 2003
with interest at the bank's base rate plus 1% per annum.
The credit facilities require the Company, among other things, to maintain a
minimum tangible net worth of $5.5 million and a minimum quick ratio (current
assets, not including inventory, less current liabilities) of 2 to 1. As of
December 31, 2002, the Company's tangible net worth fell below the minimum
tangible net worth then in effect and the bank waived this covenant. On March
20, 2003, the Company renewed its credit facilities with the bank and a new
covenant structure is in place. (Refer to Note 11 for amendment.)
Other long-term obligations represent uncollateralized non-interest-bearing
amounts payable for the acquisition of various purchased intangibles that are
generally due within two years.
As of December 31, 2002, annual maturities under the equipment financing
facility, the existing equipment term loan, and the other long-term obligations
are as follows (includes capital lease obligations):
FISCAL YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------- --------------
2003.................................................... $ 841
2004.................................................... 85
2005.................................................... 6
2006.................................................... 2
---------
Total........................................... $ 934
=========
5. LEASE COMMITMENTS
Equipment with a net book value of $28,000 and $37,000 at December 31, 2002
and 2001, respectively, (net of accumulated amortization of $80,000 and $47,000)
has been leased under capital leases.
The Company leases its principal facility under a noncancelable operating
lease expiring on December 31, 2004. Rent expense was approximately $463,000,
$773,000 and $965,000 in 2002, 2001 and 2000, respectively.
F-12
Future minimum payments under the Company's leases at December 31, 2002 are:
CAPITAL OPERATING
LEASES LEASES
---------- ----------
(IN THOUSANDS)
2003................................................ 20 540
2004................................................ 8 761
2005................................................ 8 67
2006................................................ 3 --
---------- ----------
Total..................................... 39 $ 1,368
Amount representing interest........................ (11) ==========
----------
Present value....................................... 28
Current portion..................................... (15)
----------
Long-term portion................................... $ 13
==========
The Company has sublet a portion of its office space to sub-tenants. The future
minimum lease payments due to the Company under these subleases is $210,000 at
December 31, 2002 of which $102,000 is for the year ending December 31, 2003,
$59,000 is for the year ending December 31, 2004 and $49,000 is for the year
ending December 31, 2005.
6. STOCKHOLDERS' EQUITY
1994 STOCK PURCHASE PLAN
Under the 1994 Stock Purchase Plan (the "Plan"), the Company could sell
common stock to employees of the Company at the fair market value as determined
by the Board of Directors. Sales are to be made pursuant to restricted stock
purchase agreements containing provisions established by the Board of Directors.
No shares were issued under the Plan in 2001, 2000 and 1999. The Company has the
right to repurchase these shares at the original issuance price upon termination
of employment; this right expires ratably over four years. During 2001 the
Company repurchased no shares. During 2000 and 1999, the Company repurchased
5,782 and 10,084 shares, respectively, at prices ranging from $0.06 to $0.23 per
share. At December 31, 2002 and at December 31, 2001, no shares were subject to
repurchase and no shares were available for future grant.
1997 STOCK PLAN
As of December 31, 2002, the Company has reserved 7,579,652 shares of common
stock for issuance, at the discretion of the Board of Directors, to officers,
directors, employees and consultants pursuant to its 1997 Stock Plan. This
reserved amount was increased automatically on January 1, 2003 under the
provisions of the Plan by 985,000 shares to 8,564,562 shares reserved. This
excludes a maximum of 38,645 additional shares that may be transferred from the
1994 Stock Purchase Plan. The 1997 Stock Plan also provides for an automatic
annual increase on the first day of 2003, 2004 and 2005 equal to the lesser of
985,000 shares, 4.94% of the outstanding common stock on the last day of the
immediately preceding fiscal year, or such lesser number as determined by the
Board of Directors.
Options granted under the 1997 Stock Plan generally vest over four years and
expire ten years from the date of grant.
STOCK OPTION REPRICING
On May 9, 2001, the Company offered to exchange all outstanding options
granted under the Company's 1997 Stock Plan that had an exercise price in excess
of $1.00 per share and were held by option holders who were employees of the
Company on the date of tender and through the grant date, for new options to
purchase shares of the Company's common stock. This offer expired on June 7,
2001 and resulted in the cancellation of 2,155,032 unexercised options. Subject
to the terms and conditions of the offer, the Company has granted new options
under the 1997 Stock Plan to purchase shares of common stock in exchange for
such tendered options no earlier than six months and one day after June 7, 2001.
The exercise price per share of the new options is $1.23 which is equal to the
fair market value of the underlying common stock on the date of grant, December
10, 2001, which was determined to be the last reported sale price of the common
stock on the Nasdaq National Market on the grant date.
F-13
1999 DIRECTORS' STOCK OPTION PLAN
The Company's 1999 Directors' Stock Option Plan (the "Directors' Plan")
became effective upon the closing of the Company's initial public offering in
June 1999. Under the Directors' Plan, a total of 500,000 shares of common stock
have been reserved for the grant of nonstatutory stock options to nonemployee
directors of the Company. Options granted under the Director's Plan shall be
immediately vested and expire in five years from the date of grant.
Additional information with respect to options under the 1997 Stock Plan and
the 1999 Directors' Stock Option Plan is as follows:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
------------- -----------
Outstanding, January 1, 2000
(279,720 exercisable at a weighted average exercise price of $3.33)............. 3,243,475 $ 9.65
Granted (weighted average fair value of $10.95)................................. 2,675,450 $ 13.53
Exercised....................................................................... (365,734) $ 7.02
Canceled........................................................................ (1,664,439) $ 10.81
------------- -----------
Outstanding, December 31, 2000
(1,028,433 exercisable at a weighted average exercise price of $9.85)........... 3,888,752 $ 12.06
Granted (weighted average fair value of $1.36).................................. 4,696,844 $ 1.47
Exercised....................................................................... (192,096) $ 0.56
Canceled........................................................................ (5,057,030) $ 9.43
------------- -----------
Outstanding, December 31, 2001
(1,041,710 exercisable at a weighted average exercise price of $3.51)........... 3,336,470 $ 1.82
Granted (weighted average fair value of $0.62).................................. 1,009,000 $ 0.70
Exercised....................................................................... (79,697) $ 0.63
Canceled........................................................................ (610,685) $ 2.70
------------- -----------
Outstanding, December 31, 2002 3,655,088 $ 1.38
============= ===========
Additional information regarding options outstanding as of December 31, 2002
is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------
WEIGHTED AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
--------------- ----------- ------------ -------------- ----------- -----
$ 0.01 to $ 0.50 576,938 8.54 $ 0.43 175,998 $ 0.41
$ 0.51 to $ 5.00 2,921,650 8.97 $ 1.01 1,269,746 $ 1.19
$ 5.01 to $10.00 95,000 6.97 $ 9.11 86,708 $ 9.23
$10.01 to $15.00 29,000 3.50 $13.85 28,312 $ 13.86
$15.01 to $20.00 23,500 4.60 $16.24 22,250 $ 16.29
$20.01 to $22.50 9,000 6.75 $21.63 8,270 $ 21.69
----------- -------- --------- ---------- -------
3,655,088 8.77 $ 1.38 1,591,284 $ 2.09
=========== ==========
1999 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1999 Employee Stock Purchase Plan (the "ESPP") became
effective upon the closing of the Company's initial public offering in June
1999. Under the ESPP, eligible employees may purchase common stock through
payroll deductions, which may not exceed 20% of any employee's compensation, nor
more than 2,500 shares in any one purchase period. A total of 1,191,850 shares
of common stock has been reserved for issuance under the ESPP as of December 31,
2002. The ESPP allows for an automatic annual increase on the first day of 2003
and 2004 equal to the lesser of 250,000 shares or 1% of outstanding common stock
on the last day of the immediately preceding fiscal year. During 2002, 114,981
shares were issued under the ESPP at prices ranging from $0.37 to $0.60 per
share resulting in aggregate proceeds of $45,000. During 2001, 90,364 shares
were issued under the ESPP at prices ranging from $0.41 to $3.29 per share
resulting in aggregate proceeds of $178,000. During 2000, 104,077 shares were
issued under the ESPP at prices ranging from $9.35 to $14.56 per share and
aggregate proceeds of $1,037,000.
F-14
DEFERRED STOCK COMPENSATION
In connection with grants of certain stock options and issuance of common
stock in 2001 and 2000 the Company recorded nil (net of terminations of
$281,000) and, $85,000 (net of terminations of $283,000), respectively, for the
difference between the estimated fair value and the stock price as determined by
the Board of Directors on the date of grant/issuance. This amount is being
amortized to expense over the vesting period of the related stock/stock options
(generally four years). Amortization of deferred stock compensation for the
years ended December 31, 2002, 2001, and 2000 was $88,000, $245,000, and
$416,000 respectively.
ISSUANCE OF STOCK WARRANTS
During 2002, the Company issued certain affiliated investors warrants for
the purchase of 1,205,130 shares of common stock at an exercise price of $0.75
in connection with a common stock purchase agreement. Such warrants vested
immediately. The Company recorded fair value of the warrants of $576,000 using
the Black-Scholes pricing model using a risk free interest rate of 4.8%,
contractual life of five years and volatility of 135%. This was recorded as part
of the common stock offering costs.
During 2002, the Company issued stock warrants to a non-employee for
consulting services for the purchase of 50,000 shares of common stock at an
exercise price of $0.38. Such warrants vested immediately. The Company recorded
compensation expense equal to the fair value of the vested warrants using the
Black-Scholes pricing model using a risk free interest rate of 4.8%, contractual
life of five years and volatility of 130%. The compensation expense recorded in
2002 was $17,000 and was recognized in the accompanying statement of operations
in accordance with the related service being performed.
During 2001, the Company issued stock warrants to a nonemployee for
consulting services for the purchase of 80,000 shares of common stock at an
exercise price of $0.57. Such warrants vest over a period of four years. The
Company recorded compensation expense equal to the fair value of the vested
warrants using the Black-Scholes pricing model using a risk free interest rate
of 5.0%, contractual life of five years and volatility of 162%. The compensation
expense recorded in 2001 was $53,000.
7. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands):
YEAE ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Net loss (numerator), basic and diluted........................ $ (5,440) $ (15,132) $ (16,726)
Shares (denominator):
Weighted average common shares outstanding................... 20,529 19,946 19,621
Weighted average common shares outstanding subject
to repurchase............................................. -- (27) (291)
---------- ---------- ----------
Shares used in computation, basic and diluted................ 20,529 19,919 19,330
========== ========== ==========
Net loss per share, basic and diluted.......................... $ (0.26) $ (0.76) $ (0.87)
========== ========== ==========
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been anti-dilutive. Such outstanding
securities consist of the following:
DECEMBER 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
Shares of common stock subject to repurchase............... -- -- 184,167
Outstanding options........................................ 3,655,088 3,336,470 3,888,752
Warrants................................................... 1,335,130 80,000 --
------------ ------------ ------------
Total............................................ 4,990,218 3,416,470 4,072,919
============ ============ ============
Weighted average exercise price of options................. $ 1.38 $ 1.82 $ 12.06
============ ============ ============
Weighted average exercise price of warrants................ $ 0.73 $ 0.57 $ --
============ ============ ============
F-15
8. INCOME TAXES
The Company's deferred income tax assets are comprised of the following at
December 31:
2002 2001
---------- ----------
(IN THOUSANDS)
Net deferred tax assets:
Net operating loss carryforwards..................... $ 20,330 $ 17,491
Accruals deductible in different periods............. 595 179
General business credits............................. 3,593 2,469
Depreciation and amortization........................ 3,308 3,485
---------- ----------
27,826 23,624
Valuation allowance.................................. (27,826) (23,624)
---------- ----------
Total........................................ $ -- $ --
========== ===========
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards. Due to the uncertainty surrounding the
realization of the benefits of its favorable tax attributes in future tax
returns, as of December 31, 2002 and 2001, the Company has fully reserved its
net deferred tax assets of approximately $27.8 million and $23.6 million,
respectively.
The Company's effective rate differs from the expected benefit at the
federal statutory tax rate at December 31 as follows:
2002 2001 2000
-------- -------- --------
Federal statutory tax rate.................... (35.0)% (35.0)% (35.0)%
State taxes, net of federal benefit........... (6.0) (6.0) (6.0)
Stock compensation expense.................... -- -- 1.0
Other......................................... 0.3 0.1 0.4
Valuation allowance........................... 40.7 40.9 39.6
-------- -------- --------
Effective tax rate............................. --% --% --%
======== ======== =========
Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.
At December 31, 2002, the Company has net operating loss (NOL) carryforwards
of approximately $55.9 million and $8.6 million for federal and state income tax
purposes, respectively. The federal NOL carryforwards expire through 2022, while
the state NOL carryforwards expire through 2012. The net operating loss
carryforwards available for state tax purposes are substantially less than for
federal tax purposes, primarily because only 50% of state net operating losses
can be utilized to offset future state taxable income and because state net
operating loss carry forwards generated in earlier years have already expired.
At December 31, 2002, the Company also has research and development credit
carryforwards of approximately $1.7 million and $1.6 million available to offset
future federal and state income taxes, respectively. The federal credit
carryforward expires in 2022, while the state credit carryforward has no
expiration.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
9. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company is engaged in the development and marketing of transactional
application server software products and operates in one reportable segment
under SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION.
F-16
GEOGRAPHIC INFORMATION
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- ------------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES(1) ASSETS REVENUES(1) ASSETS REVENUES(1) ASSETS
----------- ------ ----------- ------ ----------- ------
(IN THOUSANDS)
United States............ $ 9,764 $ 538 $ 11,989 $ 1,526 $ 18,107 $ 6,054
Europe................... 4,550 14 5,505 54 4,755 73
Rest of the world........ 272 1 1,877 2 2,415 72
-------- ------- -------- ------- -------- -------
$ 14,586 $ 553 $ 19,371 $ 1,582 $ 25,277 $ 6,199
======== ======= ======== ======= ======== =======
__________
(1) Revenues are broken out geographically by the ship-to location of the
customer.
SIGNIFICANT CUSTOMERS
During 2002, one customer accounted for 26% of the Company's total revenues
and another customer accounted for 13% of the Company's total revenues. During
2001, one customer accounted for 15% of the Company's total revenues and another
customer accounted for 11% of the Company's total revenues. During 2000, one
customer accounted for 16% of the Company's total revenues and one customer (a
common stockholder) accounted for 5% of the Company's total revenues.
At December 31, 2002, two customers accounted for 25% of accounts
receivable. At December 31, 2001, two customers accounted for 11% of accounts
receivable.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute a percentage of their eligible compensation (presently
from 1% to 20% up to the maximum allowed under IRS rules). Company contributions
are discretionary; no such Company contributions have been made since inception
of this plan.
11. SUBSEQUENT EVENTS
On March 20, 2003, the Company has renewed its credit facilities with a
bank. Under the renewed facilities, the Company continues to have a revolving
line of credit facility of up to $2.5 million available through April 30, 2004.
The banks renewed credit facilities require the Company, among other things, to
maintain certain working capital, tangible net worth and profitability
covenants. We expect to meet these covenants. Borrowings under the facility are
collateralized by substantially all of the Company's assets.
F-17
PERSISTENCE SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
PAGE
----
Audited Consolidated Financial Statement Schedule:
Independent Auditors' Report............................................ S-2
Schedule II-- Consolidated Schedule of Valuation and Qualifying
Accounts for the years ended December 31, 2002, 2001 and 2000........ S-3
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
S-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Persistence Software, Inc.:
We have audited the consolidated financial statements of Persistence
Software, Inc. and subsidiaries (the "Company") as of December 31, 2002 and
2001, and for each of the three years in the period ended December 31, 2002, and
have issued our report thereon dated January 24, 2003 (March 20, 2003 as to Note
11). Our audits also included the consolidated financial statement schedule of
the Company listed in the Index at Item 15(a)(2). This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
January 24, 2003
S-2
SCHEDULE II
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
$000'S BEGINNING CHARGED TO COST DEDUCTIONS/ BALANCE AT
OF YEAR AND EXPENSES WRITE-OFFS END OF YEAR
------- ------------ ---------- -----------
Year ended December 31, 2000 Allowance for
doubtful accounts .............................. $ 332 $ 915 $ (19) $ 1,228
Year ended December 31, 2001 Allowance for
doubtful accounts............................... $ 1,228 $ 951 $ (2,027) $ 152
Year ended December 31, 2002 Allowance for
doubtful accounts............................... $ 152 $ 353 $ (285) $ 220
S-3