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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-25857
================================================================================
PERSISTENCE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3138935
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(Address of principal executive offices, including zip code)
(650) 372-3600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in the Exchange Act Rule 12b-2). Yes [ ] No [X]
As of April 30, 2003, there were 24,044,735 shares of the registrant's
Common Stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. 3
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31,
2003 AND DECEMBER 31, 2002. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 8
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK. 23
ITEM 4. CONTROLS AND PROCEDURES. 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 25
ITEM 5. OTHER INFORMATION. 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 25
SIGNATURES 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
[1]
ASSETS
Current assets:
Cash and cash equivalents $ 7,101 $ 8,903
Accounts receivable, net 1,995 1,252
Prepaid expenses and other current assets 236 392
------------ ------------
Total current assets 9,332 10,547
Property and equipment, net 290 375
Purchased intangibles, net 87 123
Deposits and other assets 55 55
------------ ------------
Total assets $ 9,764 $ 11,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 293 $ 325
Accrued compensation and related benefits 770 722
Other accrued liabilities 1,026 1,188
Deferred revenues net of long-term portion 2,584 2,529
Current portion of long-term obligations 780 841
------------ ------------
Total current liabilities 5,453 5,605
Long-term liabilities:
Long-term portion of deferred revenues 534 691
Long-term obligations 64 93
------------ ------------
Total long-term liabilities 598 784
------------ ------------
Total liabilities 6,051 6,389
------------ ------------
Stockholders' equity:
Preferred stock -- --
Common stock 66,114 66,103
Deferred stock compensation (25) (31)
Accumulated deficit (62,377) (61,370)
Accumulated other comprehensive loss 1 9
------------ ------------
Total stockholders' equity 3,713 4,711
------------ ------------
Total liabilities and stockholders' equity $ 9,764 $ 11,100
============ ============
[1] The condensed consolidated balance sheet as of December 31, 2002 has been
extracted from the consolidated financial statements as of that date, and
does not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
------------------------
2003 2002
--------- ---------
Revenues:
Licenses $ 1,294 $ 833
Service 1,229 1,328
--------- ---------
Total revenues 2,523 2,161
--------- ---------
Cost of revenues:
Licenses 3 27
Service 477 768
--------- ---------
Total cost of revenues 480 795
--------- ---------
Gross profit 2,043 1,366
Operating expenses:
Sales and marketing 1,531 2,434
Research and development 849 1,118
General and administrative 643 927
Amortization of purchased intangibles 36 212
--------- ---------
Total operating expenses 3,059 4,691
--------- ---------
Loss from operations (1,016) (3,325)
Interest and other income (expense):
Interest income 19 35
Interest expense (8) (10)
Other, net (3) (9)
--------- ---------
Total interest and other income (expense) 8 16
--------- ---------
Net loss $ (1,008) $ (3,309)
========= =========
Basic and diluted net loss per share $ (0.04) $ (0.16)
========= =========
Shares used in calculating basic
and diluted net loss per share 24,026 20,089
========= =========
See notes to condensed consolidated financial statements.
4
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,008) $(3,309)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 141 381
Amortization of deferred stock compensation 6 34
Issuance of warrants and options to non-employees and other (8) --
Changes in operating assets and liabilities:
Accounts receivable (743) 226
Prepaid expenses and other current assets 156 112
Accounts payable (32) (127)
Accrued compensation and related benefits 48 112
Other accrued liabilities (161) 20
Deferred revenues (102) 2,503
-------- --------
Net cash used in operating activities (1,703) (48)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (19) (26)
Purchased intangibles additions -- (45)
Deposits and other assets -- (9)
-------- --------
Net cash used in investing activities (19) (80)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 15 76
Borrowing under capital lease obligations -- 34
Repayment of obligations incurred to acquire purchased intangibles -- (55)
Borrowing under loan agreement -- --
Repayment of long term liabilities (87) (139)
-------- --------
Net cash used in financing activities (72) (84)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (8) (10)
-------- --------
CASH AND CASH EQUIVALENTS:
Net decrease (1,802) (222)
Beginning of period 8,903 7,411
-------- --------
End of period $ 7,101 $ 7,189
======== ========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
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 is designed to position
business information for more efficient access for users, dramatically reduce
network traffic and data latency, and result in better application performance
at a much lower infrastructure cost. Persistence integrated Data Services
include: object-relational mapping, transactional caching, synchronization,
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.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this filing on
Form 10-Q as of March 31, 2003 and for the three month periods ended March 31,
2003 and 2002 have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Certain information and footnote disclosures normally
included in complete financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The December 31, 2002 balance sheet was extracted from
audited financial statements as of that date, but does not include all
disclosures required by generally accepted accounting principles for complete
financial statements. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the annual
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K as of and for year ended December 31, 2002
filed with the Securities and Exchange Commission.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's condensed
consolidated financial position as of March 31, 2003, its condensed consolidated
results of operations for the three month periods ended March 31, 2003 and 2002,
and its condensed consolidated cash flows for the three month periods ended
March 31, 2003 and 2002, have been made. The results of operations and cash
flows for any interim period are not necessarily indicative of the operating
results and cash flows for any future interim or annual periods.
3. NET LOSS PER SHARE
Basic net loss per common share excludes dilution and is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period. 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.
As of March 31, 2003 and 2002, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been anti-dilutive. Such outstanding
securities consist of the following (in thousands):
MARCH 31, MARCH 31,
2003 2002
-------- --------
Outstanding options 3,266 3,353
Warrants 1,335 80
-------- --------
Total 4,601 3,433
======== ========
4. ACCOUNTING FOR STOCK BASED COMPENSATION
Statement of Financial Accounting Standards (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
6
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 for the three months ended March 31,
2003 and 2002; risk free interest rate of 1.87% for the three months ended March
31, 2003 and 4.73% for the three months ended March 31, 2002; volatility of 155%
for the three months ended March 31, 2003 and 151% for the three months ended
March 31, 2002; 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 three months ended March 31, 2003 and 2002) would have
been approximately as follows (in thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
-------- --------
Net loss as reported ............................................. $(1,008) $(3,309)
Add: Stock-based employee compensation expense included in
reported loss ................................................. 6 34
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards .................. (117) (448)
-------- --------
Pro forma net loss ............................................... $(1,119) $(3,723)
======== ========
Basic and diluted net loss applicable to common shareholders
per share:
As reported ...................................................... $ (0.04) $ (0.16)
Pro forma ........................................................ $ (0.05) $ (0.19)
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.
5. COMPREHENSIVE INCOME
The components of comprehensive loss, consisting of the Company's reported
net loss and unrealized gains or losses in the translation of foreign
currencies, are as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
-------- --------
Net loss ......................................................... $(1,008) $(3,309)
Other comprehensive income (loss)................................. 8 (10)
-------- --------
Total comprehensive loss ......................................... $(1,000) $(3,319)
======== ========
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board (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 adopted 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 market 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, AND 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
7
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 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 (see footnote No. 4). 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 Company adopted the disclosure provisions of FIN 45
effective January 1, 2003 and has provided the required disclosures in Note 7.
7. INDEMNIFICATION
In its agreements with customers, the Company generally warrants that its
software products will perform in all material respects in accordance with its
standard published specifications in effect at the time of delivery of the
licensed products to the customer. The Company also typically warrants that its
maintenance services will be performed consistent with its maintenance policy in
effect at the time those services are delivered. The Company believes its
maintenance policy is consistent with generally accepted industry standards. If
necessary, the Company would provide for the estimated cost of product and
service warranties based on specific warranty claims and claim history, however,
the Company has not incurred significant expense under its product or services
warranties. As a result, the Company believes the estimated fair value on these
agreements is minimal.
The Company's customer agreements customarily provide for indemnification of
customers for intellectual property infringement claims. Such agreements
generally limit the scope of the available remedies in a variety of
industry-standard methods, included but not limited to product usage, a right to
control the defense or settlement of any claim, and a right to replace or modify
the infringing products to make them non-infringing. The Company has not
incurred significant expenses related to these indemnification agreements and no
material claim for such indemnifications is outstanding as of March 31, 2003.
As a result, the Company believes the estimated fair value of these agreements
is minimal.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our consolidated
financial statements as of December 31, 2002 and 2001 and for each of the years
ended December 31, 2002, 2001 and 2000, included in our Annual Report on Form
10-K as of and for the year ended December 31, 2002 filed with the Securities
and Exchange Commission. In addition, this Management's Discussion and Analysis
of Financial Condition and Results of Operations and other parts of this Form
10-Q contain forward-looking statements that involve risks and uncertainties.
Words such as "anticipates," "believes," "plans," "expects," "future,"
"intends," "targeting," and similar expressions identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or forecasted. Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled "Additional Factors That May Affect Future Results" and those appearing
elsewhere in this Form 10-Q and our Annual Report on Form 10-K as of and for the
year ended December 31, 2002 filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. We
assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting forward-looking
statements.
OVERVIEW
Persistence 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 is designed to position
business information for more efficient access for users, dramatically reduce
network traffic and data latency, and result in better application performance
at a much lower infrastructure cost. Persistence integrated Data Services
8
include: object-relational mapping, transactional caching, synchronization,
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 is designed to ensure 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 are designed to 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 and the first three months ended March 31, 2003
consisted of Adobe, Air France, Applied Biosystems, Cablevision, Citadel,
Eurocontrol, Fiducia AG, Intershop, i2, JP Morgan Chase, Lucent, Motorola,
NetJets, Nokia, Reuters Financial Software and Salomon Smith Barney.
Our revenues, which consist of software license revenues and service
revenues, totaled $2.5 million in the three months ended March 31, 2003 and $2.2
million in the three months ended March 31, 2002. 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 central processing units deploying our software.
Service revenues consist of professional services consulting, customer support
and training. Because we only commenced selling EDGEXTEND and DIRECTATERT 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 $1.6
million in the three months ended March 31, 2003, $797,000 in the three months
ended March 31, 2002, $4.8 million in 2002, $7.4 million in 2001 and $7.2
million in 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 revenue from product
sales to a limited number of customers. Sales of products to our top five
customers accounted for 52% of our total revenues in the three months ended
March 31, 2003, 46% of our total revenues in the three months ended March 31,
2002, 55% of total revenues in 2002, 45% of total revenues in 2001, and 40% of
total revenues in 2000. In addition, the identity of our top five customers has
changed from year to year. In the future, it is likely that a relatively few
large customers could continue to account for a relatively large proportion of
our revenues and these customers are likely to differ year to year.
9
To date, we have sold our products primarily through our direct sales force,
and we will need to continue to hire sales people, in particular those with
expertise in channel sales, in order to meet our sales goals. In addition, our
ability to achieve significant revenue growth will depend in large part on our
success in establishing and leveraging relationships with independent software
vendors, systems integrators, OEM partners and other resellers.
Our critical accounting policies and estimates were discussed in our Annual
Report on Form 10-K as of and for the year ended December 31, 2002. No changes
in these policies and estimates have occurred for the three months ended March
31, 2003.
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.
We recognize license revenues upon shipment of the software if collection of
the resulting receivable is probable, an agreement has been executed, the fee is
fixed or determinable and vendor-specific objective evidence exists to allocate
a portion of the total fee to any undelivered elements of the arrangement.
Undelivered elements in these arrangements typically consist of services or
additional software products. For sales made through distributors, revenue is
recognized upon shipment. Distributors have no right of return. Royalty revenues
are recognized when the software or services has been delivered, collection is
reasonably assured and the fees are determinable. We recognize revenues from
customer training, support and professional services consulting as the services
are performed. We generally recognize support revenues ratably over the term of
the support contract. If support or professional services consulting are
included in an arrangement that includes a license agreement, amounts related to
support or professional services consulting are allocated based on
vendor-specific objective evidence. Vendor-specific objective evidence for
support and professional services consulting is based on the price at which such
elements are sold separately, or, when not sold separately, the price
established by management having the relevant authority to make such decision.
Arrangements that require significant modification or customization of software
are recognized under the percentage of completion method.
Since inception, we have incurred substantial research and development costs
and have invested heavily in the expansion of our sales, marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. We had 68 employees as of December 31, 2002 and 60 as
of March 31, 2003, representing a decrease of 12%. This decrease was due
primarily to assessments during the quarter of efficient staffing requirements..
We have incurred net losses in each quarter since 1996 and, as of March 31,
2003, had an accumulated deficit of $62.4 million. We are currently targeting
that each of 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 beginning
in either the third or fourth quarter 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 growing and widespread adoption of the market for
data services and data integration.
RESULTS OF OPERATIONS
THREE MONTHS (FIRST QUARTERS) ENDED MARCH 31, 2003 AND 2002
Revenues
Our revenues were $2.5 million for the three months ended March 31, 2003 and
$2.2 million for the three months ended March 31, 2002, representing an increase
of 14%. International revenues were $1.6 million for the three months ended
March 31, 2003 and $797,000 for the three months ended March 31, 2002,
representing an increase of 102%. The increase was primarily due to a large sale
to Adobe Systems in Germany. For the three months ended March 31, 2003, Adobe
Systems and JP Morgan Chase accounted for 23% and 10% of total revenues
respectively and sales of products and services to our top five customers
accounted for 52% of total revenues. For the three months ended March 31, 2002,
Salomon Smith Barney and Lucent Technologies accounted for 15% and 10% of total
revenues respectively and sales of products and services to our top five
customers accounted for 46% of total revenues.
10
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 $1.3 million for
the three months ended March 31, 2003 and $833,000 for the three months ended
March 31, 2002, representing an increase of 55%. License revenues represented
51% of total revenues for the three months ended March 31, 2003 and 39% of total
revenues for the three months ended March 31, 2002. The difference in software
license revenues was primarily due to the deferral of license revenue for a
major contract negotiated in the first quarter of 2002, which resulted in lower
revenue recognized in the same period. 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,
revenues may remain flat or decline for 2003 compared to 2002.
Service Revenues. Service revenues consist of professional services
consulting, customer support and training. Our service revenues were $1.2
million for the three months ended March 31, 2003 and $1.3 million for the three
months ended March 31, 2002, representing a decrease of 7%. Service revenues
represented 49% of total revenues for the three months ended March 31, 2003 and
61% of total revenues for the three months ended March 31, 2002.
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 $3,000 for the three months ended March 31, 2003 and $27,000 for
the three months ended March 31, 2002. As a percentage of license revenues, cost
of license revenues decreased to less than 1% for the three months ended March
31, 2003 from 3% for the three months ended March 31, 2002. The decrease in cost
of revenues was largely due to the lower sales of third party software that
required the payment of royalties. Cost of license revenues may vary between
periods depending on the sales of any licensed third party products.
Cost of Service Revenues. Cost of service revenues consists of personnel,
contractors and other costs related to the provision of professional services
consulting, customer support and training. Our cost of service revenues was
$477,000 for the three months ended March 31, 2003 and $768,000 for the three
months ended March 31, 2002, representing a decrease of 38%. This decrease was
primarily due to a reduction in staffing and personnel related costs and a
reduction in our use of external consultants. As a percentage of service
revenues, cost of service revenues was 39% for the three months ended March 31,
2003 and 58% for the three months ended March 31, 2002. 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 marketing and promotional expenses. Our sales and
marketing expenses were $1.5 million for the three months ended March 31, 2003
and $2.4 million for the three months ended March 31, 2002, representing a
decrease of 37%. This decrease was primarily due to a reduction in staffing and
personnel related costs as well as lower paid commissions as compared to the
three months ended March 31, 2002 as a result of payments made on a major
contract negotiated in the first quarter of 2002 on which revenue was not
recognized until subsequent periods. Sales and marketing expenses represented
61% of total revenues for the three months ended March 31, 2003 and 113% of
total revenues for the three months ended March 31, 2002. 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, product managers and
quality assurance personnel and payments to external software consultants. Our
research and development expenses were $849,000 for the three months ended March
31, 2003 and $1.1 million for the three months ended March 31, 2002,
representing a decrease of 24%. This decrease was primarily due to a reduction
in staffing and personnel related costs. Research and development expenses
represented 34% of total revenues for the three months ended March 31, 2003 and
52% of total revenues for the three months ended March 31, 2002. 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, bad debt
write-offs and various costs associated with our status as a public company. Our
general and administrative expenses were $643,000 for the three months ended
March 31, 2003 and $927,000 for the three months ended March 31, 2002,
representing a decrease of 31%. This decrease was due primarily to reductions in
staffing and personnel related costs and bad debt expenses. General and
administrative expenses represented 25% of total revenues for the three months
11
ended March 31, 2003 and 43% of total revenues for the three months ended March
31, 2002. We are presently targeting that 2003 general and administrative
expense levels will be lower than comparable 2002 expense levels.
Amortization of Purchased Intangibles. Amortization of purchased intangibles
was $36,000 for the three months ended March 31, 2003 and $212,000 for the three
months ended March 31, 2002, representing a decrease of 83%. The decrease in
amortization expense was related to several intangible assets that were fully
amortized in 2002 and due to a revaluation and impairment review in December
2002 which resulted in a write-off of purchased intangibles of $160,000.
Interest and Other Income (Expense). Interest and other income (expense)
consists primarily of earnings on our cash and cash equivalents, offset by
interest expense related to obligations under capital leases and other equipment
related borrowings, and various miscellaneous state and foreign taxes and other
expenses. Interest and other income (expense) was $8,000 for the three months
ended March 31, 2003 and $16,000 for the three months ended March 31, 2002,
representing a decrease of 50%.
Stock-Based Compensation. Certain options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value
for accounting purposes was greater than the stock price as determined by the
Board of Directors on the date of grant or issuance. Total deferred stock
compensation associated with equity transactions as of March 31, 2003 was
$25,000, 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 $6,000 in the three months ended
March 31, 2003 and $34,000 in the three months ended March 31, 2002. We expect
to record amortization expense related to these securities of approximately
$6,000 for the remainder of 2003.
Provision for Income Taxes. Since inception, we have incurred net operating
losses for federal and state tax purposes and have only recognized minimal tax
provisions within our international subsidiaries. We have placed a full
valuation allowance against our net deferred tax assets due to the uncertainty
surrounding the realization of these assets. We evaluate on a quarterly basis
the recoverability of the net deferred tax assets and the level of the valuation
allowance. If and when we determine that it is more likely than not that the
deferred tax assets are realizable, the valuation allowance will be reduced.
QUARTERLY RESULTS OF OPERATIONS
Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate in the future, as a result of a number of factors,
many of which are outside our control. These factors include:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o shifts in demand for and market acceptance among our various products,
including 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 market;
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;
12
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 a private
placement of our 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 also are
financing our business through loans as described below and capital leases. As
of March 31, 2003, we had $7.1 million of cash and cash equivalents and our
working capital was $3.9 million.
Net cash used in operating activities was $1.7 million for the three months
ended March 31, 2003 and $48,000 for the three months ended March 31, 2002. For
the three months ended March 31, 2003, cash used in operating activities was
attributable primarily to net losses and an increase in accounts receivable from
one large sale in the last week of the quarter. For the three months ended March
31, 2002, cash used in operating activities was attributable primarily to net
losses offset by an increase in deferred revenue and depreciation and
amortization.
Net cash used in investing activities was $19,000 for the three months ended
March 31, 2003 and $80,000 for the three months ended March 31, 2002. For the
three months ended March 31, 2003, net cash used in investing activities was
attributable to the purchase of property and equipment. For the three months
ended March 31, 2002, net cash used in investing activities was attributable
primarily to the purchase of intangibles.
Net cash used in financing activities was $72,000 for the three months ended
March 31, 2003 and $84,000 for the three months ended March 31, 2002. For the
three months ended March 31, 2003, net cash used in financing activities was
attributable primarily to loan repayments. For the three months ended March 31,
2002, net cash used in financing activities was attributable primarily to loan
repayments offset by sales of common stock as a result of option exercises.
We have credit facilities with Comerica Bank. We have a $2.5 million
revolving line of credit facility at March 31, 2003 available through April 30,
2004 under which no borrowings were outstanding as of March 31, 2003. We also
have a $655,000 equipment term loan under which $175,000 was outstanding as of
March 31, 2003. 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. We also have an additional $149,000 equipment term loan under
which $133,000 was outstanding as of March 31, 2003. This facility is 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 require that the Company, among other things, maintain
certain working capital, tangible net worth and profitability covenants. As of
March 31, 2003 we were in compliance with our debt covenants and we expect to
meet these covenants in the future, provided that we meet our targets with
respect to revenues and accounts receivable collections. 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 March 31,
2004, provided that we meet our targets with respect to revenues and accounts
receivable collections.
13
If we experience difficulties in achieving our targets with respect to
revenues and accounts receivable collections, 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 an additional
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.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the other
information contained in this quarterly report on Form 10-Q. The risks and
uncertainties described below are intended to be the ones that are specific to
our company or industry and that we deem to be material, but are not the only
ones that we face.
WE HAVE A LIMITED OPERATING HISTORY IN THE 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 $1 million in the three months
ended March 31, 2003, $5.4 million in 2002, $15.1 million in 2001 and $16.7
million in 2000. As of March 31, 2003, we had an accumulated deficit of $62.4
million. While we are currently targeting decreases in each of sales and
marketing, research and development, and general and administrative expenses for
2003, as compared to each of the levels of those expenses in 2002, we will still
need to achieve our targets with respect to revenues and accounts receivable
collections 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.
14
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 flows from operations for the year
ending December 31, 2003.
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 March 31, 2004
provided that we meet our targets with respect to revenues and accounts
receivable collections.
If we experience difficulties in achieving our targets with respect to
revenues and accounts receivable collections, 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 an additional
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 services 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;
15
o the mix of domestic and international sales; and
o our success in penetrating international markets and general economic
conditions in these markets.
We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. Also, we tend to
experience slower sales patterns in Europe in the third quarter. Because a
substantial portion of our costs are relatively fixed and based on anticipated
revenues, a failure to book an expected order in a given quarter would not be
offset by a corresponding reduction in costs and could adversely affect our
operating results.
OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO
IT IS DIFFICULT TO FORECAST OUR REVENUES.
Any delay in sales of our products or services could cause our quarterly
revenues and operating results to fluctuate. The typical sales cycle of our
products is long and unpredictable and requires both a significant capital
investment decision by our customers and our education of prospective customers
regarding the use and benefits of our products. Our sales cycle is generally
between three and nine months. A successful sales cycle typically includes
presentations to both business and technical decision makers, as well as a
limited pilot program to establish a technical fit. Our products typically are
purchased as part of a significant enhancement to a customer's information
technology system. The implementation of our products involves a significant
commitment of resources by prospective customers. Accordingly, a purchase
decision for a potential customer typically requires the approval of several
senior decision makers. Our sales cycle is affected by the business conditions
of each prospective customer, as well as the overall economic climate for
technology-related capital expenditures. Due to the relative importance of many
of our product sales, a lost or delayed sale could adversely affect our
quarterly operating results. Our sales cycle is affected by seasonal
fluctuations as a result of our customers' fiscal year budgeting cycles and slow
summer purchasing patterns in Europe.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. In addition, the identity of our
top five customers has changed from year to year. In the three months ended
March 31, 2003, sales of products and services to our top five customers
accounted for 52% of total revenues, with Adobe Systems and JP Morgan Chase
accounting for 23% and 10% of total revenues, respectively. In the three months
ended March 31, 2002, sales of products and services to our top five customers
accounted for 46% of total revenues with Salomon Smith Barney and Lucent
Technologies accounting for 15% and 10% of total revenues, respectively. In the
year ended December 31, 2002, sales to our top five customers accounted for 55%
of total revenues with Cablevision and Salomon Smith Barney accounting for 26%
and 13% of total revenues, respectively. In the year ended December 31, 2001,
sales to our top five customers accounted for 45% of total revenues with Salomon
Smith Barney and Cablevision accounting for 15% and 11% of total revenues,
respectively. 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 and DIRECTALERT, 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 and DIRECTALERT, 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.
16
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
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.
17
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.
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;
18
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 we may
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.
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.
19
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 64% of our total revenues
came from sales of products and services outside of the United States for the
three months ended March 31, 2003 and approximately 37% of our revenues came
from sales of products and services outside of the United States for the three
months ended March 31, 2002. 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, we expect that we will depend more heavily on third party
distributors to sell our products in the future; however we have not yet
achieved results from this strategy. The success of our international strategy
will depend on our ability to develop and maintain productive relationships with
these third parties. The failure to develop key international markets for our
products could cause a reduction in our revenues. Additional risks related to
our international expansion and operation include:
o difficulties of staffing, funding and managing foreign operations;
o future dependence on the sales efforts of our third party distributors
to expand business;
o longer payment cycles typically associated with international sales;
o tariffs and other trade barriers;
o failure to comply with a wide variety of complex foreign laws and
changing regulations;
o exposure to political instability, acts of war, terrorism and economic
downturns;
20
o failure to localize our products for foreign markets;
o restrictions under U.S. law on the export of technologies;
o potentially adverse tax consequences;
o reduced protection of intellectual property rights in some countries;
and
o currency fluctuations.
The majority of our product sales outside the United States are denominated
in U.S. dollars. We do not currently engage in any hedging transactions to
reduce our exposure to currency fluctuations as a result of our foreign
operations. We are not currently ISO 9000 compliant, nor are we attempting to
meet all foreign technical standards that may apply to our products. Our failure
to develop our international sales channel as planned could cause a decline in
our revenues.
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION
MAY BE IMPAIRED.
Our success depends on our ability to protect our proprietary rights to the
technologies used in our products, and yet the measures we are taking to protect
these rights may not be adequate. If we are not adequately protected, our
competitors could use the intellectual property that we have developed to
enhance their products and services, which could harm our business. We rely on a
combination of patents, copyright and trademark laws, trade secrets,
confidentiality provisions and other contractual provisions to protect our
proprietary technology, but these legal means afford only limited protection.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. In addition, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States. Litigation may be necessary to
enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
WE MAY BE SUED FOR PATENT INFRINGEMENT.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. As the number of entrants
into our market increases, the possibility of an intellectual property claim
against us grows. For example, we may be inadvertently infringing a patent of
which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our current stockholders sell substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
and unregistered shares to be registered in the future, the market price of our
common stock could fall. As of March 31, 2003, we had approximately 24,044,735
shares of common stock outstanding. Virtually all of our shares, other than
shares held of affiliates, are freely tradable. Shares held by affiliates are
tradable, subject to the volume and other restrictions of Rule 144. In addition,
we filed a registration statement on Form S-3 with the SEC on April 30, 2003
covering the resale of 3,758,692 shares of our common stock and 1,335,130 shares
of common stock issuable upon exercise of outstanding warrants on behalf of
certain stockholders, including funds affiliated with Needham Capital Partners.
We have also agreed to file an additional registration statement on the request
of the stockholders affiliated with Needham Capital Partners under certain
circumstances. Upon the effectiveness of the registration statement filed on
April 30, 2003, the stockholders included in the registration statement may
freely trade their registered shares in the public market (subject to certain
restrictions as a result of the status of the stockholders as affiliates of the
Company) which could result in a decrease in the price of our stock. These sales
of common stock could impede our ability to raise funds at an advantageous
price, or at all, through the sale of securities.
21
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
are seeking approval for a reverse stock split at our upcoming annual meeting of
stockholders in June 2003 in order to enable us to maintain our Nasdaq SmallCap
Market listing. If our stock is delisted from the Nasdaq SmallCap Market, 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.
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;
22
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
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 3. 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 the three months ended March 31, 2003, our operating results
would not have changed materially. As of March 31, 2003, 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 March 31, 2003. We estimate that a hypothetical ten percent change
in foreign currency rates in the three months ended March 31, 2003 would not
have impacted our financial results of operations materially. We do not hedge
any of our foreign currency exposure.
23
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined at Exchange Act Rules 13a-14(c) and 15d-14(c). Based on
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 SEC rules and forms. It should
be noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and the design of our
disclosure controls and procedures may not achieve our stated goals under all
potential future conditions, regardless of how remote. No significant changes
were made to the Company's internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not currently subject to any material legal proceedings,
though it may from time to time become a party to various legal proceedings that
arise in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) SALES OF UNREGISTERED SECURITIES. On October 18, 2002, the company
issued to RTX Securities Corporation a warrant to purchase up to 50,000 shares
of common stock, at a purchase price equal to $0.38 per share in connection with
the engagement of RTX Securities Corporation by the Company. The issuance of the
above warrant was deemed to be exempt from registration under the Securities Act
in reliance on Section 4(2) of the Securities Act of 1933, as amended, as a
transaction by an issuer not involving any public offering. RTX Securities
Corporation may exercise the warrant at any time after the date of issuance.
ITEM 5. OTHER INFORMATION.
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the "Act"), we are
required to disclose the non-audit services approved by our Audit Committee to
be performed by Deloitte & Touche LLP, our external auditor. Non-audit services
are defined in the Act as services other than those provided in connection with
an audit or a review of the financial statements of a company. Deloitte & Touche
LLP did not provide any non audit services for the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
4.3* Common Stock Warrant, Warrant No. W-CS-2, dated October 18, 2002,
issued to RTX Securities Corporation.
10.23* Registration Rights Agreement dated as of October 18, 2002 between
Persistence and RTX Securities Corporation.
99.1 Certificate of Chief Executive Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certificate of Chief Financial Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to our Registration Statement on Form S-3 (File No.
333-104878), filed on April 30, 2003.
(b) REPORTS ON FORM 8-K:
A report on Form 8-K filed April 24, 2003, reporting under Item 9 the
announcement that on April 24, 2003, the Company issued a press release
regarding its financial results for the quarter ended March 31, 2003. In
accordance with Securities and Exchange Commission Release No. 33-8216, the
information contained in the Form 8-K, which was intended to be furnished under
Item 12, "Results of Operations and Financial Condition," was instead furnished
under Item 9, "Regulation FD Disclosure."
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ Christine Russell
------------------------
CHRISTINE RUSSELL
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: May 15, 2003
26
CERTIFICATIONS
I, Christopher T. Keene, Chief Executive Officer of the registrant, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Persistence
Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ CHRISTOPHER T. KEENE
-------------------------
Christopher T. Keene
Chief Executive Officer
27
CERTIFICATIONS
I, Christine Russell, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Persistence
Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ CHRISTINE RUSSELL
-----------------------
Christine Russell
Chief Financial Officer
28
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
4.3* Common Stock Warrant, Warrant No W-CS-2, dated October 18,
2002, issued to RTX Securities Corporation.
10.23* Registration Rights Agreement dated as of October 18, 2002
between Persistence and RTX Securities Corporation.
99.1 Certificate of Chief Executive Officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certificate of Chief Financial Officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to our Registration Statement on Form S-3 (File No.
333-104878), filed on April 30, 2003.