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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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 July 31, 2003, there were 2,406,430 shares of the registrant's Common
Stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS. 3
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30,
2003 AND DECEMBER 31, 2002. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED JUNE 30, 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. 9
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. 26
ITEM 4. CONTROLS AND PROCEDURES. 26
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS. 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 28
SIGNATURES 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,174 $ 8,903
Accounts receivable, net 1,948 1,252
Prepaid expenses and other current assets 222 392
------------ ------------
Total current assets 8,344 10,547
Property and equipment, net 205 375
Purchased intangibles, net 78 123
Other assets 55 55
------------ ------------
Total assets $ 8,682 $ 11,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 412 $ 325
Accrued compensation and related benefits 748 722
Other accrued liabilities 1,088 1,188
Deferred revenues net of long-term portion 2,257 2,529
Current portion of long-term obligations 713 841
------------ ------------
Total current liabilities 5,218 5,605
Long-term liabilities:
Long-term portion of deferred revenues 373 691
Long-term obligations 35 93
------------ ------------
Total long-term liabilities 408 784
------------ ------------
Total liabilities 5,626 6,389
------------ ------------
Stockholders' equity:
Preferred stock -- --
Common stock 66,085 66,103
Deferred stock compensation (23) (31)
Accumulated deficit (63,002) (61,370)
Accumulated other comprehensive loss (4) 9
------------ ------------
Total stockholders' equity 3,056 4,711
------------ ------------
Total liabilities and stockholders' equity $ 8,682 $ 11,100
------------ ------------
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 SIX MONTHS ENDED
----------------------------- -----------------------------
JUN. 30, JUN. 30, JUN. 30, JUN. 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Licenses $ 1,656 $ 4,104 $ 2,950 $ 4,937
Service 1,220 1,626 2,449 2,954
------------ ------------ ------------ ------------
Total revenues 2,876 5,730 5,399 7,891
------------ ------------ ------------ ------------
Cost of revenues:
Licenses 22 75 61 102
Service 459 759 936 1,527
------------ ------------ ------------ ------------
Total cost of revenues 481 834 997 1,629
------------ ------------ ------------ ------------
Gross profit 2,395 4,896 4,402 6,262
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 1,545 2,586 3,076 5,020
Research and development, 803 1,038 1,652 2,156
General and administrative 657 919 1,300 1,846
Amortization and impairment of purchased intangibles -- 142 -- 354
------------ ------------ ------------ ------------
Total operating expenses 3,005 4,685 6,028 9,376
------------ ------------ ------------ ------------
Income/(Loss) from operations (610) 211 (1,626) (3,114)
Interest income 16 21 35 55
Interest and other expense (11) (14) (22) (25)
------------ ------------ ------------ ------------
Income/(loss) before income taxes (605) 218 (1,613) (3,084)
Income taxes (19) (3) (19) (10)
------------ ------------ ------------ ------------
Net income/(loss) $ (624) $ 215 $ (1,632) $ (3,094)
============ ============ ============ ============
Basic net income/(loss) per share $ (0.26) $ 0.11 $ (0.68) $ (1.54)
============ ============ ============ ============
Diluted net income/(loss) per share $ (0.26) $ 0.10 $ (0.68) $ (1.54)
============ ============ ============ ============
Shares used in calculating basic net income/(loss) per
share 2,406 2,015 2,404 2,012
============ ============ ============ ============
Shares used in calculating diluted net
income/(loss) per share 2,406 2,048 2,404 2,012
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
-------------------------
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,632) $ (3,094)
Adjustments to reconcile net loss to net cash provided by/(used in)
operating activities:
Depreciation and amortization 237 688
Amortization of deferred stock compensation 8 54
Issuance of warrants and options to non-employees and other (4) --
Changes in operating assets and liabilities:
Accounts receivable (net) (696) 512
Prepaid expenses and other current assets 170 132
Accounts payable 87 (487)
Accrued compensation and related benefits 26 249
Other accrued liabilities (100) 478
Deferred revenues (590) 1,705
---------- ----------
Net cash provided by/(used in) operating activities (2,494) 237
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (24) (48)
Proceeds from sale of property and equipment 2 --
Purchased intangibles additions -- (45)
Deposits and other assets -- (8)
---------- ----------
Net cash used in investing activities (22) (101)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 20 76
Issuance costs - common stock offering (40) --
Borrowing under capital lease obligations -- 12
Repayment of obligations incurred to acquire purchased intangibles -- (110)
Repayment under long term liabilities (180) (213)
---------- ----------
Net cash used in financing activities (200) (235)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (13) 6
---------- ----------
CASH AND CASH EQUIVALENTS:
Net decrease (2,729) (93)
Beginning of period 8,903 7,411
---------- ----------
End of period $ 6,174 $ 7,318
========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired by capital leases -- (22)
========== ==========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Persistence Software solves data access problems for distributed and
real-time systems. The Company's software products help deliver better business
visibility for applications which require current information about customers,
products and suppliers. The Company 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, 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.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this filing on
Form 10-Q as of June 30, 2003 and for the three and six month periods ended June
30, 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 June 30, 2003, its condensed consolidated
results of operations for the three and six month periods ended June 30, 2003
and 2002, and its condensed consolidated cash flows for the six month periods
ended June 30, 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 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, with the
exception of the three months ended June 30, 2002.
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net income/(loss) per share (in thousands, except
per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---------- ---------- ----------- -----------
Net income/(loss) (numerator), basic and diluted $ (624) $ 215 $ (1,632) $ (3,094)
========== ========== =========== ===========
Shares (denominator):
Weighted average common shares outstanding used
in computing basic earnings per share 2,406 2,015 2,404 2,012
Common stock equivalents related to
employee stock options and warrants 0 33 0 0
---------- ---------- ----------- -----------
Shares used in computation, diluted earnings per share 2,406 2,048 2,404 2,012
========== ========== =========== ===========
Basic net income/(loss) per share $ (0.26) $ 0.11 $ (0.68) $ (1.54)
========== ========== =========== ===========
Diluted net income/(loss) per share $ (0.26) $ 0.10 $ (0.68) $ (1.54)
========== ========== =========== ===========
As of June 30, 2003, 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):
6
JUNE 30, JUNE 30,
2003 2002
-------- --------
Outstanding options 426 339
Warrants 134 8
-------- --------
Total 560 347
-------- --------
4. ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for stock based compensation granted to employees and
directors under the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
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 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 June 30, 2003 and 2002 and 30 months following vesting for
the six months ended June 30, 2003 and 2002; risk free interest rate of 1.81%
for the three months ended June 30, 2003, 4.49% for the three months ended June
30, 2002, 1.81% for the six months ended June 30, 2003 and 4.71% for the six
months ended June 30, 2002; volatility of 144% for the three months ended June
30, 2003, 146% for the three months ended June 30, 2002, 145% for the six months
ended June 30, 2003 and 146% for the six months ended June 30, 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
six months ended June 30, 2003 and 2002) would have been approximately as
follows (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ----------- -----------
Net loss as reported ........................................ $ (624) $ 215 $ (1,632) $ (3,094)
Add: Stock-based employee compensation expense
included in reported loss ............................... 2 20 8 54
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards .......................................... (139) (244) (256) (692)
---------- ---------- ----------- -----------
Pro forma net loss .......................................... $ (761) $ (9) $ (1,880) $ (3,732)
========== ========== =========== ===========
Basic net loss applicable to common shareholders per share:
As reported ................................................. $ (0.26) $ 0.11 $ (0.68) $ (1.54)
Pro forma ................................................... $ (0.32) $ 0.00 $ (0.78) $ (1.85)
Diluted net loss applicable to common shareholders per share:
As reported ................................................. $ (0.26) $ 0.10 $ (0.68) $ (1.54)
Pro forma ................................................... $ (0.32) $ 0.00 $ (0.78) $ (1.85)
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.
7
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):
SIX MONTHS ENDED JUNE 30,
-------------------------
2003 2002
----------- -----------
Net loss.................................... $ (1,632) $ (3,094)
Other comprehensive income (loss) .......... (13) 6
----------- -----------
Total comprehensive loss.................... $ (1,645) $ (3,088)
----------- -----------
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 November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING FOR DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS. The Company has adopted the disclosure
requirements of this standard with respect to obligations under guarantees.
In November 2002, the EITF reached a consensus on Issue No. 00-21, REVENUE
ARRANGEMENTS WITH MULTIPLE DELIVERABLES, or EITF 00-21. EITF 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF 00-21 apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. We do not believe the adoption of EITF
00-21 will have a material impact on our financial position or results of
operations.
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. 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 January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES. FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, CONSOLIDATED FINANCIAL STATEMENTS, for certain
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities creased after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is currently
evaluating the impact of adopting FIN 46. However, the Company does not believe
that it is party to any arrangement that would fall within the scope of FIN 46.
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and hedging
relationships designated after June 30, 2003, except for those provisions of
SFAS No. 149 which relate to SFAS No. 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003. For those
issues, the provisions that are currently in effect should continue to be
8
applied in accordance with their respective effective dates. In addition,
certain provisions of SFAS No. 149, which relate to forward purchases or sales
of when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The Company currently believes that the adoption of SFAS No. 149 will not
have a material impact on its financial statements.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
the scope of SFAS No. 150 as a liability. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for the Company beginning June 15, 2003. The Company currently
believes that the adoption of SFAS No. 149 will not have a material impact on
its financial statements.
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 consistently 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 of these
warranty provisions 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 to a variety of
industry-standard methods, including 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 June 30, 2003. As
a result, the Company believes the estimated fair value of these indemnification
provisions is minimal.
8. REVERSE STOCK SPLIT
On June 12, 2003, the Company effected a 1-for-10 reverse stock split that
was previously approved at its Annual Meeting of Stockholders for the year ended
December 31, 2002. Accordingly all share and per share amounts in this quarterly
report on Form 10-Q have been adjusted to reflect the 1-for-10 reverse stock
split.
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
9
business information for more efficient access for users, to dramatically reduce
network traffic and data latency, and to achieve better application performance
at a much lower infrastructure cost.
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 remain 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.
We believe that our customers are able to more effectively manage enterprise
data through re-architecting their IT infrastructure using Persistence data
services products. Our products 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.
Our EDGEXTEND product 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 six months ended June 30, 2003
consisted of Adobe Systems, Air France, Applied Biosystems, Cablevision,
Citadel, Citigroup Global Markets (formerly known as Salomon Smith Barney),
Eurocontrol, Fiducia AG, Intershop, i2, JP Morgan Chase, Lucent, Motorola,
NetJets, Nokia, Reuters Financial Software and Spirent Communications.
Our revenues, which consist of software license revenues and service
revenues, totaled $5.4 million in the six months ended June 30, 2003 and $7.9
million in the six months ended June 30, 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 DirectAlert in 2002,
we have a limited operating history in the data services markets. We currently
expect that sales of our older POWERTIER application server 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 $2.2
million in the six months ended June 30, 2003, $1.6 million in the six months
ended June 30, 2002, $4.8 million in 2002, $7.4 million in 2001 and $7.2 million
in 2000. The decrease in international revenues from 2001 to 2002 is primarily
attributable to general economic conditions in Asia, which was a factor in our
decision to close our sales office in Asia in 2002. 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 58% of our total revenues in the six months ended June
30, 2003, 64% of our total revenues in the six months ended June 30, 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.
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 consultative, technology and architecture-driven sales, in order to
meet our sales goals. Likewise, our marketing resources will be reallocated in
support of this sales process. In addition, our ability to achieve significant
revenue growth will depend in large part on our success in establishing and
leveraging relationships with systems integrators, independent software vendors,
OEM partners and other resellers.
10
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.
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 62 as
of June 30, 2003, representing a decrease of 9%. This decrease was due primarily
to a reduction in personnel during the quarter in order to maintain efficient
staffing. We have incurred net losses in each quarter since 1996 with the
exception of the three months ended June 30, 2002 and, as of June 30, 2003, had
an accumulated deficit of $63.0 million.
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 the 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to revenue recognition, bad
debts, intangible assets, income taxes, restructuring costs, and contingencies
and litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
REVENUE RECOGNITION. Our revenue recognition policy is significant because
our revenue is a key component of our results of operations. In addition, our
revenue recognition determines the timing of certain expenses, such as
commissions. We follow specific and detailed guidelines in measuring and
recognizing revenue. We recognize license revenues upon shipment of the software
if collection of the resulting receivable is probable, an agreement has been
executed, the fee is fixed or determinable and vendor-specific objective
evidence exists to allocate a portion of the total fee to any undelivered
elements of the arrangement. Undelivered elements in these arrangements
typically consist of services. For sales made through distributors, revenue is
recognized upon shipment. Distributors have no right of return. Royalty revenues
are recognized when the software or services has been delivered, collection is
reasonably assured and the fees are determinable. We recognize revenues from
customer training, support and professional services as the services are
performed. We generally recognize support revenues ratably over the term of the
support contract. If support or professional services are included in an
arrangement that includes a license agreement, amounts related to support or
professional services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price at which such elements are sold separately, or, when not sold
separately, the price established by management having the relevant authority to
make such decision. While more infrequent, arrangements that require significant
modification or customization of software are recognized under the completion of
contract method.
BAD DEBTS. Our bad debt policy requires that we maintain a specific
allowance for certain doubtful accounts and a general allowance for the majority
of the non-specifically reserved accounts. These allowances provide for
estimated losses resulting from the inability or refusal of our customers to
make required payments. We analyze such factors as historical bad debt
experience, customer payment patterns and current economic trends. This analysis
requires significant judgment. If the financial condition of the company's
customers were to deteriorate further, additional allowances would generally be
required resulting in future losses that are not included in our allowances for
doubtful accounts at June 30, 2004.
PURCHASED TECHNOLOGY AND INTANGIBLES. Our business acquisitions typically
resulted in goodwill and other intangible assets, which affect the amount of
future period amortization expense and possible impairment expense that we will
incur. The determination of the value of such intangible assets requires
11
management to make estimates and assumptions that affect our consolidated
financial statements and operating results. Accordingly in 2002, we took an
impairment charge of $160,000. In 2001, we took an impairment charge of $2.0
million.
STOCK COMPENSATION. We account for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no accounting
recognition is given to employee stock options granted with an exercise price
equal to fair market value of the underlying stock on the grant date. Upon
exercise, the net proceeds and any related tax benefit are credited to
stockholders' equity. Our operating results would be affected if other
alternatives were used. Information about the impact on our operating results of
using the alternative of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
is included in Note 4 of the "Notes to Condensed Consolidated Financial
Statements," included elsewhere in this report.
INCOME TAXES. Our income tax policy records the estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets, as well as
operating loss and tax credit carry-forwards. We follow specific and detailed
guidelines regarding the recoverability of any tax assets recorded on the
balance sheet and provide any necessary allowances as required.
RESULTS OF OPERATIONS
THREE MONTHS (SECOND QUARTERS) ENDED JUNE 30, 2003 AND 2002
Revenues
Our revenues were $2.9 million for the three months ended June 30, 2003 and
$5.7 million for the three months ended June 30, 2002, representing a decrease
of 50%. International revenues were $614,000 for the three months ended June 30,
2003 and $826,000 for the three months ended June 30, 2002, representing a
decrease of 26%. For the three months ended June 30, 2003, Citigroup Global
Markets (formerly known as Salomon Smith Barney) accounted for 52% of total
revenues and sales of products and services to our top five customers accounted
for 69% of total revenues. For the three months ended June 30, 2002, Cablevision
and Citigroup Global Markets accounted for 43% and 21% of total revenues,
respectively, and sales of products and services to our top five customers
accounted for 75% of total revenues.
License Revenues. License revenues consist of licenses of our software
products, which generally are priced based on the number of users or central
processing units deploying our software. License revenues were $1.7 million for
the three months ended June 30, 2003 and $4.1 million for the three months ended
June 30, 2002, representing a decrease of 60%. License revenues represented 58%
of total revenues for the three months ended June 30, 2003 and 72% of total
revenues for the three months ended June 30, 2002. The decrease in software
license revenues was primarily due to the recognition in the second quarter of
2002 of deferred license revenue in the amount of $2.2 million from a major
contract that was negotiated in the first quarter of 2002. Given the continuing
industry-wide trend of dramatically reduced levels 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 June 30, 2003 and $1.6 million for the three
months ended June 30, 2002, representing a decrease of 25%. This decrease was
primarily due to lower revenues from technical support contracts in the amount
of $291,000 and to a reduced level of consulting services performed during the
second quarter of 2003, which lowered revenues by $115,000. Service revenues
represented 42% of total revenues for the three months ended June 30, 2003 and
28% of total revenues for the three months ended June 30, 2002.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of royalties,
packaging, documentation and associated shipping costs and the amortization of
third party software embedded in our software for the three months ended June
30, 2003. Our cost of license revenues was $22,000 for the three months ended
June 30, 2003 and $75,000 for the three months ended June 30, 2002. As a
percentage of license revenues, cost of license revenues was 1% for the three
months ended June 30, 2003 and 2% for the three months ended June 30, 2002. The
decrease in cost of revenues was largely due to the lower sales of third party
12
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
$459,000 for the three months ended June 30, 2003 and $759,000 for the three
months ended June 30, 2002, representing a decrease of 40%. This decrease was
primarily due to a $233,000 reduction in staffing and personnel related costs
and a $45,000 reduction in costs associated with our use of external
consultants. As a percentage of service revenues, cost of service revenues was
38% for the three months ended June 30, 2003 and 47% for the three months ended
June 30, 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 June 30, 2003
and $2.6 million for the three months ended June 30, 2002, representing a
decrease of 40%. This decrease was due to a $760,000 reduction in staffing and
personnel related costs, a decrease of $190,000 in commissions expensed due to
lower revenues as compared to the three months ended June 30, 2002, as well as a
$101,000 reduction in marketing and promotional expenses. Sales and marketing
expenses represented 54% of total revenues for the three months ended June 30,
2003 and 45% of total revenues for the three months ended June 30, 2002. We are
presently targeting that 2003 sales and marketing expense levels will be lower
than comparable 2002 expense levels because as of August 2003 we had 19 sales
and marketing employees as compared to an average of 35 such employees during
2002.
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 $803,000 for the three months ended June
30, 2003 and $1.0 million for the three months ended June 30, 2002, representing
a decrease of 23%. This decrease was due to a $208,000 reduction in staffing and
personnel related costs and a $21,000 reduction in external contractors
expenses. Research and development expenses represented 28% of total revenues
for the three months ended June 30, 2003 and 18% of total revenues for the three
months ended June 30, 2002. We are presently targeting that 2003 research and
development expense levels will be lower than comparable 2002 expense levels
because as of August 2003 we had 16 research and development employees as
compared to an average of 27 such employees during 2002.
General and Administrative. General and administrative expenses consist 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 $657,000 for the three months ended June 30, 2003
and $919,000 for the three months ended June 30, 2002, representing a decrease
of 29%. This decrease was primarily due to reductions of $99,000 of staffing and
personnel related costs and a reduction of $189,000 of bad debt expenses that
was due in part to the reversal of such expenses incurred in prior periods as a
result of unexpected favorable collection efforts. General and administrative
expenses represented 23% of total revenues for the three months ended June 30,
2003 and 16% of total revenues for the three months ended June 30, 2002. We are
presently targeting that 2003 general and administrative expense levels will be
lower than comparable 2002 expense levels because as of August 2003 we had 9
general and administrative employees as compared to an average of 13 such
employees during 2002.
Amortization of Purchased Intangibles. There was no amortization of
purchased intangibles for the three months ended June 30, 2003, as such costs,
which were $10,000, are now classified as cost of license revenues. Amortization
of purchased intangibles was $142,000 for the three months ended June 30, 2002.
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 of earnings on our cash and cash equivalents, offset by interest
expense related to obligations under capital leases and other equipment related
borrowings and other expenses. Interest and other income (expense) was ($14,000)
for the three months ended June 30, 2003 and $4,000 for the three months ended
June 30, 2002.
Stock-Based Compensation. Certain options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value
for accounting purposes was greater than the stock price as determined by the
13
Board of Directors on the date of grant or issuance. Total deferred stock
compensation associated with equity transactions as of June 30, 2003 was
$23,000, 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 $2,000 in the three months ended
June 30, 2003 and $20,000 in the three months ended June 30, 2002. We expect to
record amortization expense related to these securities of approximately $4,000
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.
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Revenues
Our total revenues were $5.4 million for the six months ended June 30, 2003
and $7.9 million for the six months ended June 30, 2002 representing a decrease
of 32%. International revenues were $2.2 million for the six months ended June
30, 2003 and $1.6 million for the six months ended June 30, 2002, representing
an increase of 37%. The increase was primarily due to a $730,000 sale to Adobe
Systems in Germany. In the six months ended June 30, 2003, sales to Citigroup
Global Markets accounted for 30% of total revenues and sales to Adobe Systems
accounted for 14% of total revenues. For the six months ended June 30, 2002,
sales to Cablevision accounted for 33% of total revenues and sales to Citigroup
Global Markets accounted for 19% of total revenues.
License Revenues. License revenues were $3.0 million for the six months
ended June 30, 2003 and $4.9 million for the six months ended June 30, 2002,
representing a decrease of 40%. The decrease in software license revenues was
primarily due to continued industry-wide downturn in spending on IT
infrastructure products. License revenues represented 55% of total revenues for
the six months ended June 30, 2003 and 63% of total revenues for the six months
ended June 30, 2002.
Service Revenues. Our service revenues were $2.4 million for the six months
ended June 30, 2003 and $3.0 million for the six months ended June 30, 2002,
representing a decrease of 17%. The decrease in service revenues was primarily
due to lower revenues from technical support contracts in the amount of $356,000
and to a reduced level of consulting services performed which lowered revenues
by $149,000. Service revenues represented 45% of total revenues for the six
months ended June 30, 2003 and 37% of total revenues for the six months ended
June 30, 2002.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of royalties,
packaging, documentation and associated shipping costs and the amortization of
third party software embedded in our software for the six months ended June 30,
2003. Our cost of license revenues was $61,000 for the six months ended June 30,
2003 and $102,000 for the six months ended June 30, 2002. As a percentage of
license revenues, cost of license revenues was 2% for the six months ended June
30, 2003 and 2% for the six months ended June 30, 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 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
$936,000 for the six months ended June 30, 2003 and $1.5 million for the six
months ended June 30, 2002, representing a decrease of 39%. This decrease was
primarily due to a $476,000 reduction in staffing and personnel related costs
and a $100,000 reduction in costs associated with our use of external
consultants. As a percentage of service revenues, cost of service revenues were
38% for the six months ended June 30, 2003 and 52% for the six months ended June
30, 2002.
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 $3.1 million for the six months ended June 30, 2003 and
$5.0 million for the six months ended June 30, 2002, representing a decrease of
14
39%. This decrease was primarily due to a $1.4 million reduction in staffing and
personnel related costs, a decrease of $428,000 in commissions expensed due to
lower revenues as compared to the six months ended June 30,2002 as well as a
$165,000 reduction in marketing and promotional expenses. Sales and marketing
expenses represented 57% of total revenues for the six months ended June 30,
2003 and 64% of total revenues for the six months ended June 30, 2002. We are
presently targeting that 2003 sales and marketing expense levels will be lower
than comparable 2002 expense levels because as of August 2003 we had 19 sales
and marketing employees as compared to an average of 35 such employees during
2002.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to external software consultants. Our
research and development expenses were $1.7 million for the six months ended
June 30, 2003 and $2.2 million for the six months ended June 30, 2002,
representing a decrease of 23%. This decrease was primarily due to a $433,000
reduction in staffing and personnel related costs. Research and development
expenses represented 31% of total revenues for the six months ended June 30,
2003 and 27% of total revenues for the six months ended June 30, 2002. We are
presently targeting that 2003 research and development expense levels will be
lower than comparable 2002 expense levels because as of August 2003 we had 16
research and development employees as compared to an average of 27 such
employees during 2002.
General and Administrative. General and administrative expenses consist 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 $1.3 million for the six months ended June 30, 2003
and $1.8 million for the six months ended June 30, 2002, representing a decrease
of 30%. This decrease was primarily due to reductions of $158,000 in staffing,
personnel related costs and general administrative expenses, and a reduction of
$268,000 of bad debt expenses that was due in part to the reversal of such
expenses incurred in prior periods as a result of unexpected favorable
collection efforts. General and administrative expenses represented 24% of total
revenues for the six months ended June 30, 2003 and 23% of total revenues for
the six months ended June 30, 2002. We are presently targeting that 2003 general
and administrative expense levels will be lower than comparable 2002 expense
levels because as of August 2003 we had 9 general and administrative employees
as compared to an average of 13 such employees during 2002.
Amortization and Impairment of Purchased Intangibles. There was no
amortization of purchased intangibles for the six months ended June 30, 2003 as
such costs, which were $46,000, are now classified as cost of license revenues.
Amortization of purchased intangibles was $354,000 for the six months ended June
30, 2002. 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 of earnings on our cash, cash equivalents, offset by interest expense
related to obligations under capital leases and other equipment related
borrowings and other expenses. Interest and other income (expense) was ($6,000)
for the six months ended June 30, 2003 and $20,000 for the six months ended June
30, 2002. The decrease in income was primarily due to a reduction of $21,000 in
interest income yielded from our cash balances.
Stock-Based Compensation. Certain options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value
for accounting purposes was greater than the stock price as determined by the
Board of Directors on the date of grant or issuance. Total deferred stock
compensation associated with equity transactions as of June 30, 2002 was
$23,000, 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 $8,000 in the six months ended June
30, 2003 and $54,000 in the six months ended June 30, 2002.
Provision for Income Tax. Since inception, we have incurred net operating
losses for federal and state tax purposes and have only recognized minimal tax
provisions within our international subsidiaries. We have placed a full
valuation allowance against our net deferred tax assets due to the uncertainty
surrounding the realization of these assets. We evaluate on a quarterly basis
the recoverability of the net deferred tax assets and the level of the valuation
allowance. If and when we determine that it is more likely than not that the
deferred tax assets are realizable, the valuation allowance will be reduced.
QUARTERLY RESULTS OF OPERATIONS
Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate in the future, as a result of a number of factors,
many of which are outside our control. These factors include:
15
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;
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. 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 June 30, 2003, we had $6.2 million of cash and cash equivalents and our
working capital was $3.1 million.
Net cash used in operating activities was $2.6 million for the six months
ended June 30, 2003 and net cash provided by operating activities was $237,000
for the six months ended June 30, 2002. For the six months ended June 30, 2003,
cash used in operating activities was attributable primarily to net losses, an
increase in accounts receivable and a decrease in deferred revenues. For the six
months ended June 30, 2002, cash provided by operating activities was
attributable primarily to a decrease in accounts receivable and an increase in
deferred revenues that was mainly due to one large sale on which revenue was
recognized in the third quarter of 2002. Cash was also provided by an increase
in other accrued liabilities and depreciation and amortization, offset by net
losses and a decrease in accounts payable.
Net cash used in investing activities was $22,000 for the six months ended
June 31, 2003 and $123,000 for the six months ended June 30, 2002. For the six
months ended June 30, 2003, net cash used in investing activities was
attributable primarily to the purchase of property and equipment. For the six
months ended June 30, 2002, net cash used in investing activities was
attributable primarily to the purchase of fixed assets and intangibles.
16
Net cash used in financing activities was $160,000 for the six months ended
June 30, 2003 and $213,000 for the six months ended June 30, 2002. For the six
months ended June 30, 2003, net cash used in financing activities was
attributable primarily to loan repayments. For the six months ended June 30,
2002, net cash used in financing activities was attributable primarily to loan
repayments partially 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 June 30, 2003 available through April 30,
2004 under which no borrowings were outstanding as of June 30, 2003. We also
have a $655,000 equipment term loan under which $109,000 was outstanding as of
June 30, 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 $108,000 was outstanding as of June 30, 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. Our credit
facilities with Comerica Bank currently require, among other things, that we
maintain a tangible net worth of at least $2.25 million. In addition, we must
experience net losses below $250,000 for the quarter ending September 30, 2003,
and we must show a profit of at least one dollar for each quarter thereafter. As
of June 30, 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, including our
intellectual property.
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 June 30, 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.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in our common stock involves significant risks. You should
carefully consider the risks and uncertainties described below and the other
information in or incorporated by reference into this prospectus including our
financial statements before deciding whether to buy shares of our common stock.
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. The trading price of our common stock could decline
due to any of these and other risks and uncertainties, and you could lose part
or all of your investment.
WE MAY NOT ACHIEVE OUR SALES TARGETS.
Because we only commenced selling our products 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;
17
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 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. As of June 30, 2003, we had an accumulated deficit of $63.0 million.
While we are currently targeting decreases in sales and marketing, research and
development, and general and administrative expenses for 2003, as compared to
the levels of those expenses in 2002, we will still need to achieve our revenue
targets in order to preserve cash. Because our product markets are new and
evolving, we cannot accurately predict either the future growth rate, if any, or
the ultimate size of the markets for our products.
IF WE ARE NOT ABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS TO FUND OUR
BUSINESS AND FAIL TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, OUR OPERATING PLANS
COULD BE RESTRICTED.
Since inception, we have generally had negative cash flow from operations.
To date, we have financed our business primarily through sales of common stock
and convertible preferred stock and not through cash generated by our
operations. We expect to have negative cash flow from operations for the year
ending December 31, 2003. We are currently targeting that our current cash and
cash equivalents will be sufficient to meet our anticipated cash needs through
at least June 30, 2004 provided that we meet our targets with respect to
revenues and accounts receivable collections.
If we experience difficulties in achieving our revenue and accounts
receivable targets, our cash and cash equivalents may not be sufficient to meet
our anticipated cash needs. Accordingly, our operating plans could be restricted
and our business could be harmed. If cash generated from operations is
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities or to obtain a credit facility. If
additional funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and the term of this debt could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders, and we may not be able to
obtain additional financing on acceptable terms, if at all. If we are unable to
obtain this additional financing, our business could be jeopardized.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY DEPRESS 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. The timing of our
sales is governed in part by our customers' capital spending budgets and thus we
may experience an absolute decline in revenues from quarter to quarter. If our
future quarterly operating results are below the expectations of securities
analysts or investors, the price of our common stock would likely decline. In
addition to the other risk factors described in this prospectus, additional
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 the level of product competition in the application server and data
services markets;
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o the mix of direct sales versus indirect distribution channel sales;
o the possible loss of sales people;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in penetrating international markets and general economic
conditions in these markets.
OUR SALES CYCLE IS LONG AND UNPREDICTABLE, SO IT IS DIFFICULT TO FORECAST OUR
REVENUES.
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. 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. 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.
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
several of our top five customers has changed from period to period, including
year to year.
% OF TOTAL REVENUES IDENTITY AND % OF TOTAL REVENUES OF TOP
PERIOD OF TOP 5 CUSTOMERS 2 CUSTOMERS
------ ------------------ -----------
Six months ended June 30, 2003 58% Citigroup Global Markets.............30%
Adobe Systems........................14
Six months ended June 30, 2002 64 Cablevision..........................33
Citigroup Global Markets.............19
Year ended December 31, 2002 55 Cablevision..........................26
Citigroup Global Markets.............13
Year ended December 31, 2001 45 Citigroup Global Markets.............15
Cablevision..........................11
Year ended December 31, 2000 40 Citigroup Global Markets.............16
Lucent Technologies...................6
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.
DECLINES IN SALES REVENUE MAY RESTRICT OUR GROWTH AND HARM OUR BUSINESS AND OUR
ABILITY TO ACHIEVE OUR FINANCIAL OBJECTIVES.
For the three years from 1997 through 2000, our sales revenues grew over the
previous year by 88%, 42% and 75%, respectively. In 2001 sales declined from the
previous year by 23%, in 2002 our sales revenues declined by 25% and in the six
months ended June 30, 2003 our sales revenues declined by 32% from the six
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months ended June 30, 2002. We believe a substantial portion of the decline in
sales of our products is due to the general downturn in information technology
spending by our prospective customers, many of whom are Fortune 500 companies.
If our prospective customers continue to defer spending on IT Infrastructure
products, such as our products, our product sales may continue to decline. Our
declining sales may also negatively affect our reputation with the investment
community, which may lead to a decline in our stock price and may also
discourage investors from purchasing our stock.
WE ARE CURRENTLY TARGETING THAT A MATERIAL PORTION OF OUR REVENUES WILL BE
DERIVED FROM SALES OF OUR NEWEST PRODUCT, EDGEXTEND; HOWEVER, THERE ARE
TECHNICAL AND MARKET RISKS ASSOCIATED WITH NEW PRODUCTS.
Sales of our EDGEXTEND products currently represent a material percentage of
our revenues. New products, like EDGEXTEND, often contain errors or defects,
particularly when first introduced. Any errors or defects could be serious or
difficult to correct and could result in a delay of product release or adoption
resulting in lost revenues or a delay in gaining market share, which could harm
our revenues and reputation. In addition, market adoption is often slower for
newer products, like EDGEXTEND, than for existing products. Because we are
focusing our marketing and sales efforts on our newer EDGEXTEND data services
product, any failure in market adoption of this product could result in our
failure to meet our revenue goals.
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.
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.
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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;
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o ability to provide a competitive return on investment to the customer;
o flexibility;
o use of standards-based technology (e.g. J2EE);
o ease of integration with customers' existing enterprise systems;
o ease and speed of implementation;
o quality of support and service;
o security;
o company reputation and perception of viability; and
o price.
In the EDGEXTEND market, alternative technology is available from a variety
of sources. Companies such as Versant, Gemstone and Excelon are middleware
vendors that offer alternative data management solutions that directly target
EDGEXTEND'S market. In addition, many prospective customers may build their own
custom solutions.
In the DIRECTALERT market, alternative approaches are provided by a variety
of sources, including the potential for internal development. Company vendors
such as SpiritSoft, TIBCO, and IBM provide message-oriented middleware software
which may evolve into competitive products. Vendors such as webMethods and
Business Objects provide alternative architectures for business intelligence
information. DIRECTALERT is based on licensed technology, which the Company is
licensed to distribute on a non-exclusive basis.
We continue to sell current and earlier versions of POWERTIER for J2EE
application server to current customers. Our competitors for POWERTIER include
both publicly and privately-held enterprises, including BEA Systems (WebLogic),
IBM (WebSphere), Oracle (OAS), Secant Technologies and Sun Microsystems (Sun ONE
Application Server). Many customers may not be willing to purchase our POWERTIER
products because they have already invested heavily in databases and other
enterprise software components offered by these competing companies. Many of
these competitors have pre-existing customer relationships, longer operating
histories, greater financial, technical, marketing and other resources, greater
name recognition and larger installed bases of customers than we do.
IF THE MARKETS FOR INFRASTRUCTURE SOFTWARE FOR NETWORKS AND WEB-BASED PRODUCTS
AND SERVICES DO NOT DEVELOP AS WE CURRENTLY ENVISION, WE MAY NOT BE ABLE TO
ACHIEVE OUR PLANNED REVENUE TARGETS.
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 RESULT IN OUR FAILURE TO ACHIEVE OUR
FINANCIAL OBJECTIVES.
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.
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OUR SALES AND DEVELOPMENT EFFORTS 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 41% of our total revenues
came from sales of products and services outside of the United States for the
six months ended June 30, 2003 and approximately 21% of our total revenues came
from sales of products and services outside of the United States for the six
months ended June 30, 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, and approximately 38% of our total revenues came from sales
of products and services outside of the United States for the year ended
December 31, 2001. We expect international revenues to continue to represent a
significant portion of our total revenues. To date, almost all of our
international revenues have resulted from our direct sales efforts. In
international markets, however, we expect that we will depend more heavily on
third party distributors to sell our products in the future. The success of our
international strategy will depend on our ability to develop and maintain
productive relationships with these third parties. The failure to develop key
international markets for our products could cause a reduction in our revenues.
Additional risks related to our international expansion and operation include:
o difficulties of staffing, funding and managing foreign operations;
o future dependence on the sales efforts of 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;
23
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, WHICH COULD BE TIME CONSUMING AND
EXPENSIVE, AND, IF SUCCESSFUL, COULD REQUIRE US TO CEASE SELLING OR MATERIALLY
CHANGE OUR PRODUCTS.
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 July 31, 2003, we had approximately 2,406,430
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 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 375,869 shares of our common stock and 133,513 shares of
common stock issued 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 on the
Company) which could result in a decrease of 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.
24
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
Our common stock price has been and may continue to be highly volatile, and
we expect that the market price of our common stock will continue to be subject
to significant fluctuations, as a result of variations in our quarterly
operating results and the overall volatility of the Nasdaq 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.
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.
IF WE DEFAULT ON OUR BANK COVENANTS, THE BANK MAY, AMONG OTHER THINGS, CEASE
ADVANCING FUNDS, DEMAND IMMEDIATE REPAYMENT AND EXERCISE ALL OTHER RIGHTS AS A
CREDITOR UNDER OUR AGREEMENTS.
We have not been able to comply with tangible net worth covenants of our
line of credit with Comerica Bank in the past, and we may not be able remain in
compliance with our renegotiated terms with the bank in the future if we
continue to have significant net losses. Our renegotiated terms require, among
other things, that we maintain a tangible net worth of at least $2.25 million.
In addition, we must experience net losses below $250,000 for the quarter ending
September 30, 2003, and we must show a profit of at least one dollar for each
quarter thereafter. Borrowings under this facility are secured by substantially
all of our assets, including our intellectual property. If we violate any
covenant in our agreements with Comerica Bank, the bank may declare us in
default of our obligations and could, among other things, refuse to advance us
any additional funds under the line of credit, accelerate our repayment
obligations under all our facilities, and exercise all of its other rights as a
creditor under our facilities, including the sale of our assets, including our
intellectual property.
THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER THAT CERTAIN OF OUR STOCKHOLDERS MAY CONSIDER
DESIRABLE.
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:
25
o establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
o authorizing the board to issue preferred stock;
o prohibiting cumulative voting in the election of directors;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent; and
o establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
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 six months ended June 30, 2003, our operating results
would not have changed materially. As of June 30, 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 June 30, 2003. We estimate that a hypothetical ten percent change
in foreign currency rates in the six months ended June 30, 2003 would not have
impacted our financial results of operations materially. We do not hedge any of
our foreign currency exposure.
ITEM 4. CONTROLS AND PROCEDURES
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 in Exchange Act Rules 13a-14(c) and
15d-14(c), as of June 30, 2003. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that these disclosure controls and
procedures are effective as of June 30, 2003. Our disclosure controls and
procedures are designed to provide a reasonable level of assurance of reaching
our desired disclosure control objectives and are effective in doing so. No
significant changes were made to our internal controls or other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
26
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 5, 2003, we held our annual meeting of stockholders for the year
ended December 31, 2002. The following summarizes the matters submitted to a
vote of the stockholders:
1. The election of two (2) Class I directors to serve until the Annual Meeting
of the stockholders for the year ending December 31, 2005:
BROKER
NON-
NOMINEE IN FAVOR OPPOSED ABSTAIN VOTES
------- -------- ------- ------- -----
Christopher Paisley 22,228,021 0 316,412 0
Lawrence Owen Brown 22,228,021 0 316,412 0
2. To approve proposals to amend the Company's Certificate of Incorporation to
enable the Company to effect one of five different reverse stock splits
during the 12 months following approval by the stockholders of such
proposals, if the Board of Directors determines that any such action is
necessary and appropriate, and in the best interests of the Company and its
stockholders, to seek to maintain the listing of the Company's Common Stock
on the Nasdaq SmallCap Market.
BROKER
NON-
PROPOSAL IN FAVOR OPPOSED ABSTAIN VOTES
-------- -------- ------- ------- -----
1-for-5 20,882,725 1,478,968 182,740 0
1-for-8 20,744,186 1,613,507 186,740 0
1-for-10 20,769,374 1,588,119 186,940 0
1-for-12 20,692,811 1,660,782 190,840 0
1-for-15 20,856,651 1,658,042 29,740 0
3. To ratify the appointment of Deloitte & Touche LLP as the independent
auditors of the Company for the fiscal year ending December 31, 2003.
BROKER
NON-
IN FAVOR OPPOSED ABSTAIN VOTES
-------- ------- ------- -----
21,113,918 346,680 1,083,835 0
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
31.1 Certificate of Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Chief Financial Officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K:
A report on Form 8-K filed July 24, 2003, reporting under Item 9 the
announcement that on July 24, 2003, the Company issued a press release regarding
its financial results for the six months ended June 30, 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."
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ Christine Russell
----------------------
CHRISTINE RUSSELL
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: August 14, 2003
29
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
31.1 Certificate of Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Chief Financial Officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.