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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
---------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT 1934
FROM THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 000-25857
PERSISTENCE SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3138935
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 372-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $7.9 million as of February 29, 2004 based upon the
closing sale price on the Nasdaq National Market reported for such date of $4.10
per share. Shares of Common Stock held by each officer and director and by each
person who owns 10% of more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 2,713,918 shares of the registrant's Common Stock issued and
outstanding as of February 29, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the 2004 Annual Meeting of Stockholders to be held on June 2,
2004.
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PART I
The matters discussed in this Annual Report on Form 10-K, including, but not
limited to, the adequacy of our financial resources to meet our currently
anticipated cash flow requirements for the next 12 months contain
forward-looking statements that involve risks and uncertainties. Words such as
"anticipates," "believes," "plans," "expects," "future," "intends," "targeting,"
and similar expressions identify forward-looking statements. These statements
are not guarantees of future performance and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed or forecasted. Factors that might cause such a difference include, but
are not limited to, those discussed in the section entitled "Additional Factors
That May Affect Future Results" and those appearing elsewhere in this annual
report on Form 10-K. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. We assume no obligation to update these forward-looking statements
to reflect actual results or changes in factors or assumptions affecting
forward-looking statements.
ITEM 1. BUSINESS.
COMPANY OVERVIEW
Persistence provides data access and caching infrastructure software
specifically designed to eliminate data access bottlenecks such as redundant or
inefficient database queries that cause poor application performance.
Persistence's technology may simplify and optimize access to complex enterprise
data for custom applications. Persistence's products provide a "data services"
layer that sits between relational databases such as Oracle and DB2 and
application servers. This data services layer provides integrated
object-to-relational mapping, caching, and cache synchronization with automated
cache management. Persistence products may support cross-platform deployment of
high-performance, custom applications written in Java, C++ or C#, including
those built for BEA WebLogic, IBM WebSphere or Microsoft .NET.
Persistence's EDGEXTEND products provide tools that generate application
programming interfaces ("APIs") for data access and caching. The caching feature
helps systems "remember" answers from each processing step. When the system
receives a request for which it already has an answer, it can respond
immediately, without traveling to back-end databases to generate an answer.
Customer profile management, global logistics, trading exchanges, financial
services trading desks, and supply chain management systems are just a few
examples of the kinds of computer systems, which can realize significant
increases in capacity and performance through online caching.
Persistence Software, Inc. was incorporated in May 1991 as Fulcrum
Innovations, Inc. Our website is www.persistence.com. We make our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports available free of charge as soon as reasonably
practicable as we file these reports with the Securities and Exchange
Commission.
INDUSTRY BACKGROUND
Information Technology ("IT") managers are faced with many challenges as
they attempt to scale their existing infrastructure to meet the ever-increasing
demands of their users. They are asked to support more users with better
response times, but without a commensurate increase in resources, both people
and money, to meet these challenges. The solutions of past years - replicated
data centers - are no longer a cost-effective option for most IT professionals.
Consequently, they are looking for alternative technology solutions to meet the
performance demands of their users while maintaining or reducing the associated
operating costs.
Common business requirements that lead IT managers to look for new data
access and caching solutions include:
o SLOW RESPONSE TIMES: Many enterprise applications were not designed to
scale to handle large numbers of concurrent users. Users accessing these
systems often experience lengthy delays as the number of concurrent
users increases.
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o INCREASED RISK TO BUSINESS CONTINUITY: Disaster recovery and fail-over
capability are crucial for systems required to operate 24 hours a day, 7
days a week. Users accessing these systems at peak volume can increase
the frequency of system crashes.
o LIMITED SCALABILITY: As applications are deployed to more and more
remote users in a system in order to improve the productivity of those
users, the customer needs a system that will scale easily without the
need and expense of additional data centers.
In large part, the problems facing enterprises today are derived from the
continuing evolution and increasing sophistication of enterprise applications.
Simple applications supporting back office systems typically had few users
accessing limited amounts of data. As decision-making based on real-time,
frequently changing data has been moved farther out to the edge of the
enterprise, the need for vital information to support these business-critical
applications has become paramount. In addition, the need to keep the cost of
these systems to a minimum provided an additional challenge to the system
architects. Traditional system architectures and approaches cannot always solve
these problems. For applications with more real-time requirements, a new data
access and caching infrastructure may be required, called a Data Services layer.
The characteristics of a next-generation Data Services layer include:
o REAL-TIME SCALABILITY: accommodate up to thousands of end users with
consistent sub-second response times;
o HIGH AVAILABILITY: handle system failures without interruption and
without losing critical information for potentially thousands of
concurrent users;
o RAPID ADAPTABILITY: allow companies to continuously improve their
business processing through automated development and management of
differentiated business-critical applications; and
o EDGE COMPUTING: enable businesses to extend their processing across
organizational boundaries, support employees, remote users and even
partners and customers.
PERSISTENCE PRODUCTS
Our EdgeXtend family of products provides a data services software
infrastructure that is specifically designed to enable high volume, high
performance, and distributed applications. Our products, EDGEXTEND for IBM
WebSphere, EDGEXTEND for BEA WebLogic, EDGEXTEND for C++ and EDGEXTEND for
Microsoft .NET, address the scalability, availability and adaptability demands
that typically occur when delivering business solutions for high demand,
globally distributed enterprise business applications. Our products offer the
following key benefits:
FASTER RESPONSE FOR CONCURRENT USERS. Our EDGEXTEND products were designed
specifically to accommodate high volume transaction processing and the data
integrity requirements of distributed applications using in-memory caching
technology. Caching is a process in which select data is copied out of back-end
systems, typically a database, and into the server cache, which allows the data
to be shared and manipulated by multiple users. This architecture helps reduce
the workload on back-end systems and accelerates application performance. The
effect of this architecture is to minimize unnecessary network traffic and
thereby enable higher performance and reliability even with significant
transaction volumes and rapidly changing data. EDGEXTEND products may offer
superior performance and scalability to support the deployment of large-scale
distributed enterprise applications.
REDUCED TIME-TO-MARKET FOR ENTERPRISE APPLICATIONS. Our EDGEXTEND products
decrease time-to-market and development cycles for sophisticated applications
due to our proprietary and patented object-to-relational mapping technology.
This technology enables the automatic generation of software code, which
minimizes basic, low-level programming tasks, such as security and database
access. EDGEXTEND may accelerate development by giving developers access to data
in a familiar way, as software components, and provides application developers
with a framework to rapidly build electronic commerce applications.
3
PROTECTS AND LEVERAGES EXISTING INFORMATION TECHNOLOGY INVESTMENTS.
EDGEXTEND enables developers to build new enterprise applications while
simultaneously integrating existing back-end systems. EDGEXTEND'S flexible
architecture integrates with disparate database servers, web servers and
multiple clients, while supporting multiple programming languages and computing
platforms. EDGEXTEND may provides enhanced flexibility and inter-operability to
link existing enterprise applications and systems, allowing businesses to
leverage their investments in information technology and extend them to the edge
of their enterprise and beyond.
OPTIMIZED DISTRIBUTED DATA SERVICES ARCHITECTURE. All our products are built
on the core Persistence technologies of Object/Relational Mapping, Intelligent
Caching and Cache Synchronization. This integrated technology, called a Data
Services layer, allows for a data access and caching architecture that is highly
scalable, suitable for high volume transaction oriented applications, and
capable of supporting thousands of concurrent users.
PERSISTENCE STRATEGY
We intend to position Persistence as a technology leader for data access and
caching infrastructure software, based on numerous years of successful customer
deployments and a portfolio of patents. Our value proposition is that our
integrated data access and caching solutions can provide higher performance and
greater reliability than stand-alone data access or caching products.
The market for our products is Fortune 2000 corporations and software
vendors who are building custom applications to solve critical business
problems. Our target buyers are senior architects and project managers who
select data access and caching technology for projects with complex data and
fast response time requirements.
LEVERAGE INSTALLED CUSTOMER BASE. We believe there are significant
opportunities to expand the use of our products throughout our current customer
base. This ability is particularly true for customers who have successfully
adopted our technology for a particular part of their business and have not
selected an enterprise standard for data access and caching. We believe we have
an opportunity to leverage our existing success with those customers on a
broader basis by working with their architectural standards group to make our
products a standard for data services throughout their enterprise.
MAINTAIN OUR INTERNATIONAL PRESENCE. We believe there are significant
international opportunities for our products and services, in particular in
Europe and the United Kingdom. Currently, we have established direct sales
operations in the United Kingdom. In addition to our direct sales operations, we
also sell our products throughout central Europe through a distributor.
PRODUCTS
EDGEXTEND FOR JAVA
Our EDGEXTEND FOR JAVA products simplify and optimize Java access to
enterprise data by providing tightly integrated data mapping, intelligent
caching and guaranteed cache synchronization. These products can be used in
stand-along Java applications or integrated with J2EE application servers such
as IBM WebSphere, and BEA WebLogic.
EDGEXTEND FOR C++ (formerly POWERTIER for C++)
Our EDGEXTEND for C++ products simplify and optimize C++ access to
enterprise data by providing tightly integrated mapping, intelligent caching and
guaranteed cache synchronization.
DIRECT ALERT
DIRECTALERT is an add-on product for EDGEXTEND and POWERTIER that adds
rule-based client notification to our data services layer. This is particularly
valuable for trading and logistics systems, where changes in key data elements
are very important to end users. DIRECTALERT is designed to proactively notify
business applications, ranging from desktop applications and ordinary web
browsers to mobile phones and television set-top boxes.
4
POWERTIER
POWERTIER is a specialized J2EE application server for customers wanting
optimal data access and caching performance who do not already have a standard
J2EE container.
CUSTOMERS
Our software products are licensed to customers worldwide for use in a wide
range of data-intensive applications, including real-time electronic trading,
supply chain management, network management, application outsourcing and
logistics management. Our services consist of professional consulting services,
technical support and training. The following table lists our customers who have
purchased a significant amount of our products or services in 2003, 2002 and
2001 (defined as approximately 5% or more of our total revenues in such year.)
COMMUNICATIONS FINANCIAL SERVICES/EXCHANGES
CSC Holdings (Cablevision) Citigroup Global Markets
Lucent Technologies Citadel Investment Group
Motorola Fiducia AG
E-COMMERCE/INTERNET OTHER
i2 Technologies Adobe Systems
In 2003, sales of products and services to Citigroup Global Markets
accounted for 21% of our total revenues. In 2002, sales of products and services
to Cablevision accounted for 26% of our total revenues and sales to Citigroup
Global Markets accounted for 13% of our total revenues. In 2001, sales of
products and services to Citigroup Global Markets accounted for 15% of our total
revenues and sales to Cablevision accounted for 11% of our total revenues.
See also "Note 9. Segment Information, Operations by Geographic Area and
Significant Customers" in the Notes to Consolidated Financial Statements
included in this Annual Report on Form 10-K.
SALES AND MARKETING
We sell our products through both a direct sales force and a third party
distributor. As of December 31, 2003, we had 13 people in our sales and
marketing organization, of which eight were in the United States and five were
in Europe. Our overall 2004 sales and marketing expense compared to 2003 is
expected to decrease due to our reduction of headcount in the third and fourth
quarters of 2003.
Our sales cycle is relatively long, generally between three and nine months.
A successful sales cycle typically includes presentations to both business and
technical decision makers, as well as a limited pilot program, a proof of
concept, to establish a technical fit.
COMPETITION
The markets for our products are intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our markets are:
o performance, including scalability, integrity and availability;
o ability to provide a competitive return on investment to the customer;
o flexibility;
o use of standards-based technology (e.g. J2EE);
o ease of integration with customers' existing enterprise systems;
o ease and speed of implementation;
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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 Oracle, Versant, Gemstone, Progress Software and
Tangasol 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.
Competitors for POWERTIER include BEA Systems (WebLogic), IBM (WebSphere),
Oracle (OAS) 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.
INTELLECTUAL PROPERTY RIGHTS
Our performance may depend on our ability to protect our proprietary rights
to the technologies used in our principal products. If our intellectual property
is not adequately protected, our competitors could use the intellectual property
that we have developed to enhance their products and services, which would harm
our business. We rely on a combination of patents, copyright and trademark laws,
trade secrets, confidentiality provisions and other contractual provisions to
protect our proprietary rights, but these legal means afford only limited
protection. As of February 29, 2004, we had five issued United States patents
and three pending United States patent applications with allowable subject
matter. These patents expire beginning in 2013. Despite any measures taken to
protect our intellectual property, unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we regard as
proprietary. In addition, the laws of some foreign countries may not protect our
intellectual property rights as fully as do the laws of the United States. Thus,
the measures we are taking to protect our intellectual property rights in the
United States and abroad may not be adequate. Finally, our competitors may
independently develop similar technologies.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. As the number of entrants
into our market increases, the possibility of an intellectual property claim
against us grows. For example, we may be inadvertently infringing a patent of
which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.
In March 1998, we entered into a license agreement with Sun Microsystems,
pursuant to which we granted Sun Microsystems rights to manufacture and sell, by
itself and not jointly with others, products under a number of our patents and
Sun Microsystems granted us rights to manufacture and sell, by ourselves and not
jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell competing products that would, in
the absence of this license agreement, infringe our patents. Under this
agreement, Sun Microsystems made a one-time payment to us. Neither Sun
Microsystems nor we can transfer the license without the consent of the other
party.
6
In January 2001, we entered into a license agreement with both webGain and
Secant to manufacture and sell products under three of our patents. Under this
agreement, both webGain and Secant made a one-time payment to us.
We own or have rights to trademarks or trade names that we use in
conjunction with the sale of our products and services. "Persistence," as well
as the logo for "Live Object Cache," are registered trademarks owned by us. We
have registrations pending for the use of our logo with "Persistence."
"POWERTIER," "EDGEXTEND" and "The Engine for E-Commerce" are also trademarks of
ours.
EMPLOYEES
As of December 31, 2003, we had 39 full-time employees, including 13 in
sales and marketing, 17 in research and development and technical services, and
nine in general and administrative functions. Our relationships with our
employees are generally good. From time to time, we also employ independent
contractors to support our sales and marketing, research and development,
professional services and administrative organizations.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth specific information regarding our executive
officers as of February 29, 2004:
NAME AGE POSITION
---- --- --------
Christopher T. Keene......................43 Chief Executive Officer and Secretary
Derek Henninger...........................41 Vice President of Worldwide Field Operations
Vivek Singhal.............................35 Vice President of Engineering
Brian Tobin...............................44 Acting Chief Financial Officer
Each executive officer serves at the sole discretion of the Board of
Directors.
CHRISTOPHER T. KEENE co-founded Persistence and has served as Chief
Executive Officer and a director since June 1991 and as Chairman of the Board
since April 1999. From June 1991 to April 1999, Mr. Keene also served as
President. Before founding Persistence, Mr. Keene worked at McKinsey & Company,
Ashton-Tate and Hewlett-Packard. Mr. Keene holds a B.S. degree in Mathematical
Sciences with honors from Stanford University and an M.B.A. degree from The
Wharton School at the University of Pennsylvania.
DEREK HENNINGER co-founded Persistence and since January 2003 has served as
Vice President of Worldwide Field Operations. From January 2002 until January
2003, Mr. Henninger served as Vice President of Customer Care. From June 1991
until January 2002, he served as Vice President of Engineering. Mr. Henninger
holds a B.A. degree in Economics and a B.S. degree in computer Science and
Mathematics from the University of California at Davis.
VIVEK SINGHAL has served as Vice President, Engineering since January 2002.
Mr. Singhal joined Persistence in April 1995 as a software engineer. He holds a
B.S. degree in Computer Science from the Massachusetts Institute of Technology
and a Ph.D. in Computer Science from the University of Texas at Austin.
BRIAN TOBIN has served as Acting Chief Financial Officer since October 2003.
From October 2002 to October 2003, Mr. Tobin served as Corporate Controller and
from November 2000 to October 2002, he served as Director of Accounting. From
April 1998 to November 2000, Mr. Tobin was a Manager and Director of Finance at
The Charles Schwab Corporation, a broker-dealer. He holds a B.A. degree in
Accounting from the University of Washington.
7
ITEM 2. PROPERTIES.
We are headquartered in San Mateo, California, where we lease approximately
17,000 square feet of office space under a lease expiring on December 31, 2004.
In the fourth quarter of 2003, we vacated approximately 7,500 square feet of
this facility and are actively seeking a sub-tenant. We have an engineering
staff facility in San Diego, where we lease approximately 6,000 square feet of
office space under a lease expiring on August 31, 2004. We also maintain sales
offices in the United Kingdom. We believe that our existing facilities are
adequate to meet our current and foreseeable requirements or that suitable
substitute space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently subject to any material legal proceedings. We may,
however, from time to time become a party to various legal proceedings that
arise in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK. Our common stock was traded on the Nasdaq
National Market under the symbol "PRSW" from the effective date of our initial
public offering on June 24, 1999 until September 12, 2002, at which time we
moved our stock listing to the Nasdaq SmallCap Market. Prior to the initial
public offering, no public market existed for our common stock. The price per
share reflected in the table below represents the range of low and high closing
sale prices for our common stock as reported in the Nasdaq National Market
(before September 12, 2002) or the Nasdaq SmallCap Market (both on and after
September 12, 2002) for the periods indicated. In addition, we effected a 1 for
10 reverse stock split of our common stock on June 12, 2003, and the prices of
our shares shown below for periods prior to June 12, 2003 have been adjusted to
reflect what the price of our shares would have been had the reverse split been
in effect at that time.
HIGH LOW
---- ---
For The Year Ended December 31, 2002:
First Quarter.......................................... $ 18.50 $ 8.70
Second Quarter......................................... $ 10.00 $ 5.30
Third Quarter.......................................... $ 8.20 $ 4.20
Fourth Quarter......................................... $ 7.20 $ 3.00
For The Year Ended December 31, 2003:
First Quarter.......................................... $ 6.70 $ 1.50
Second Quarter......................................... $ 6.10 $ 2.00
Third Quarter.......................................... $ 6.24 $ 3.05
Fourth Quarter......................................... $ 6.45 $ 3.54
We had 146 stockholders of record as of February 29, 2004, including several
holders who are nominees for an undetermined number of beneficial owners. The
closing sale price of our common stock as reported on the Nasdaq SmallCap Market
on March 15, 2004 was $3.79.
DIVIDEND POLICY. We have never paid dividends on our common stock or
preferred stock. We currently intend to retain any future earnings to fund the
development of our business. Therefore, we do not currently anticipate declaring
or paying dividends in the foreseeable future. In addition, our line of credit
agreement prohibits us from paying dividends.
RECENT SALES OF UNREGISTERED SECURITIES. On December 1, 2003, we issued
300,000 shares of our common stock at a price of $3.73 per share for an
aggregate sale price of $1,119,000, and warrants to purchase up to 60,000 shares
of our common stock at an exercise price of $4.48 per share to certain
purchasers. Security Research Associates, Inc. served as placement agent for the
transaction, and received a placement fee of 5% of the gross proceeds of the
private placement and a warrant to purchase up to 30,000 shares of our common
stock at an exercise price of $4.48 per share. The warrants expire on the
earlier of December 1, 2008 or the closing of a merger, acquisition or sale of
substantially all of the assets of Persistence. In issuing these securities, we
relied upon Section 4(2) of the Securities Act on the basis that the transaction
did not involve a public offering.
9
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this annual report on Form 10-K.
The consolidated statements of operations data for the years ended December 31,
2003, 2002 and 2001 and the consolidated balance sheet data at December 31, 2003
and 2002, are derived from audited consolidated financial statements included
elsewhere in this annual report on Form 10-K. The consolidated statement of
operations data for the years ended December 31, 2000 and 1999, and the
consolidated balance sheet data as of December 31, 2001, 2000 and 1999 are
derived from audited consolidated financial statements not included in this
annual report on Form 10-K.
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License............................................ $ 4,560 $ 9,061 $ 10,561 $ 17,684 $ 10,890
Service............................................ 4,738 5,525 8,810 7,593 3,553
---------- ---------- --------- ---------- ---------
Total revenues............................. 9,298 14,586 19,371 25,277 14,443
Loss from operations................................. (2,694) (5,451) (15,391) (17,857) (12,165)
Net loss............................................. $ (2,706) $ (5,440) $(15,132) $ (16,726) $(11,306)
========== ========== ========= ========== =========
Basic and diluted net loss per share(1).............. $ (1.11) $ (2.65) $ (7.60) $ (8.65) $ (8.64)
========== ========== ========= ========== =========
Shares used in basic and diluted net loss per share
calculation.......................................... 2,432 2,053 1,992 1,933 1,309
========== ========== ========= ========== =========
AS OF DECEMBER 31,
--------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 5,680 $ 8,903 $ 7,411 $ 19,490 $ 29,652
Working capital......................................... 2,946 4,942 6,783 17,289 29,582
Total assets............................................ 7,627 11,100 13,755 33,641 39,092
Long-term obligations................................... 102 784 421 932 354
Total stockholders' equity.............................. 3,035 4,711 7,944 22,556 32,018
- ----------
(1) Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding for the period
(excluding shares subject to repurchase). Diluted net loss per common share
was the same as basic net loss per common share for all periods presented,
since the effect of any potentially dilutive securities is excluded as they
are anti-dilutive because of our net losses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Persistence provides data access and caching infrastructure software
specifically designed to eliminate data access bottlenecks such as redundant or
inefficient database queries that cause poor application performance.
Persistence's technology may simplify and optimize access to complex enterprise
data for custom applications. Persistence's products provide a "data services"
layer that sits between relational databases such as Oracle and DB2 and
application servers. This data services layer provides integrated
object-to-relational mapping, caching, and cache synchronization with automated
cache management. Persistence products may support cross-platform deployment of
high-performance, custom applications written in Java, C++ or C#, including
those built for BEA WebLogic, IBM WebSphere or Microsoft .NET.
10
THE CURRENT ECONOMIC ENVIRONMENT
The economic climate in which we operate has been difficult over the last
three years, and capital spending has decreased dramatically. This has had a
pronounced effect on our ability to generate new license fees, as IT budgets
have been frozen and large capital expenditures like those required to purchase
some of our products have been quite limited. Additionally, competition for
these more limited sales opportunities has increased, and we have seen intense
price competition both for new licenses and for support services. While we
believe our installed base continues to represent a solid recurring revenue
opportunity, we cannot provide any assurance that these pressures on IT spending
will ease, or that the general economic climate will improve. Continued
competitive pressure and a weak economy could have a continuing pronounced
effect on our operating results. We have undertaken a variety of cost reduction
measures designed to bring our operating expenses in line with our perceptions
of the business climate. Some of the measures taken include workforce
reductions.
SIGNIFICANT FINANCIAL EVENTS IN 2003
In 2003, our revenues declined to $9.3 million from $14.6 million in 2002,
largely due to the continued downturn in IT spending combined with the fact that
our target customers are those data- and transaction-intensive companies that
are either building a new project or rearchitecting their current system in
order to improve their data management performance. We believe that deferrals of
these large IT projects affected our license revenues in 2003. In 2003, our
operating expenses (G&A, sales and marketing and research and development)
declined to $10.3 million from $17.0 million in 2002, largely through reductions
in force and turnover (39 employees at December 31, 2003 vs. 68 employees at
December 31, 2002) and more focused engineering and sales and marketing efforts.
In June 2003 we implemented a 1 for 10 reverse stock split in order to come into
compliance with Nasdaq listing requirements. In December 2003 we completed a
private placement of shares and warrants in which we raised an aggregate of $1.1
million.
REVENUES
Our revenues, which consist of software license revenues and service
revenues, totaled $9.3 million in 2003, $14.6 million in 2002 and, $19.4 million
in 2001. 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. Our two major products, POWERTIER and
EDGEXTEND, are based on a common technology platform for application data
management. They differ mainly in that POWERTIER contains a proprietary, bundled
application server, whereas EDGEXTEND is optimized to integrate with third party
application servers, such as IBM's WebSphere and BEA's WebLogic application
servers. 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. Because a substantial
portion of our revenues result from software license revenue from a limited
number of customers, the identity of which change from quarter to quarter, in
any given quarter the percentage contribution of POWERTIER, EDGEXTEND and
DIRECTALERT to total license revenues varies, sometimes dramatically.
REVENUES FROM SALES OF PRODUCTS OUTSIDE THE UNITED STATES
We market our software and services primarily through our direct sales
organizations in the United States and the United Kingdom.
Revenues from licenses and services to customers outside the United States
were:
YEAR ENDED DECEMBER 31, REVENUES % OF TOTAL REVENUES
----------------------- -------- -------------------
2003 $3.8 million 40%
2002 4.8 million 33
2001 7.4 million 38
Sales of our products to customers in Europe declined by 21% in 2003, from
$4.6 million in 2002 to $3.6 million in 2003. Our future success will depend, in
part, on our successful development of international markets for our products.
11
LIMITED NUMBER OF CUSTOMERS
Historically, we have received a substantial portion of our revenues from a
limited number of customers.
Sales of products to our top five customers accounted for:
YEAR ENDED DECEMBER 31, % OF TOTAL REVENUES
----------------------- -------------------
2003 46%
2002 55
2001 45
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.
We have made staff reductions across all functional areas of our business in
order to manage operating expenses and conserve cash in response to continued
uncertainty in IT spending, which has affected our license revenue. We had 68
total employees as of December 31, 2002 and 39 as of December 31, 2003,
representing a decrease of 43%. This decrease was due primarily to a workforce
reduction during the third and fourth quarters to cut costs. We have incurred
net losses in each year since 1996 and as of December 31, 2003, had an
accumulated deficit of $64.1 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our 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 liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an ongoing 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. We recognize revenues in accordance with the American
Institute of Certified Public Accounts' Statement of Position 97-2, "Software
Revenue Recognition," as amended. 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.
Our revenue recognition policy is significant because our revenue is the 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.
12
ALLOWANCE FOR DOUBTFUL ACCOUNTS. A significant portion of our receivables
are concentrated with a small number of customers. 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 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 our
customers were to deteriorate further, additional allowances would generally be
required resulting in future losses that are not included in our allowances for
doubtful accounts at December 31, 2003.
PURCHASED TECHNOLOGY AND INTANGIBLES. Our business acquisitions typically
resulted in goodwill and other intangible assets. The determination of the
recoverability of such intangible assets requires management to make estimates
and assumptions about fair value 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 Statement of Financial Accounting Standards ("SFAS")
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, is included in Note 1 of the
"Notes to Condensed Consolidated Financial Statements," included elsewhere in
this report.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data for the three years
ended December 31, 2003 expressed as a percentage of total revenues:
YEARS ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
----------- ----------- -----------
Revenues:
License.................................................................... 49% 62% 55%
Service.................................................................... 51 38 45
----------- ----------- -----------
Total revenues......................................................... 100% 100% 100%
----------- ----------- -----------
Cost of revenues:
License.................................................................... 1% 2% 0%
Service.................................................................... 17 19 21
----------- ----------- -----------
Total cost of revenues................................................. 18% 21% 21%
----------- ----------- -----------
Gross profit................................................................. 82% 79% 79%
Operating expenses:
Sales and marketing........................................................ 55% 59% 74%
Research and development................................................... 32 28 29
General and administrative................................................. 26 24 28
Purchased intangibles...................................................... (2) 5 19
Restructuring costs........................................................ -- -- 9
----------- ----------- -----------
Total operating expenses............................................... 111% 116% 159%
----------- ----------- -----------
Loss from operations......................................................... (29) (37) (80)
Interest income.............................................................. 1 1 2
Interest and other expense................................................... (1) (1) (0)
----------- ----------- -----------
Loss before income taxes..................................................... (29) (37) (78)
Income taxes................................................................. (0) (0) (0)
----------- ----------- -----------
Net loss..................................................................... (29)% (37)% (78)%
13
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
REVENUES
($ IN THOUSANDS)
% CHANGE % CHANGE
-------- --------
2003 2002 - 2003 2002 2001 - 2002 2001
------------ ----------- ------------ ------------ -----------
Revenues:
License......................................... $4,560 (50)% $ 9,061 (14)% $10,561
Service......................................... 4,738 (14) 5,525 (37) 8,810
------- ----------- ----------
Total Revenues................................ 9,298 (36) 14,586 (25) 19,371
------- ----------- ----------
License revenues comprised 49% of total revenues in 2003, and service
revenues comprised 51% of total revenues for 2003. Our total revenues declined
by 36% in 2003 as compared to 2002 and by 25% in 2002 as compared to 2001. For
2003, sales to Citigroup Global Markets accounted for 21% of total revenues, and
sales to our top five customers accounted for 46% of total revenues. For 2002,
sales to Cablevision accounted for 26% of total revenues, sales to Citigroup
Global Markets accounted for 13% of total revenues, and sales to our top five
customers accounted for 55% of total revenues. For 2001, sales to Citigroup
Global Markets accounted for 15% of total revenues, sales to Cablevision
accounted for 11% of total revenues, and sales to our top five customers
accounted for 45% of total revenues.
LICENSE REVENUES. License revenues generally are priced based on the number
of users or central processing units deploying our software. License revenues
declined by 50% to $4.6 million in 2003 as compared to $9.1 million in 2002 and
by 14% in 2002 from $10.6 million in 2001. License revenues represented 49% of
total revenues for 2003, 62% of total revenues for 2002 and 55% of total
revenues in 2001. The decrease in software license revenues was primarily due
the fact that our target customers are those data- and transaction-intensive
companies that are either building a new project or contemplating a
rearchitecture of their current system in order improve their data management
performance. We believe that continued industry-wide downturn in spending on IT
infrastructure products has caused many of these target customers to delay these
large IT projects, which affected our license revenues in 2003. Given the
continuing spending starting to pick up, reduced level of information technology
spending, license revenues may continue to decline over the next several
quarters.
SERVICE REVENUES. Service revenues consist of professional services
consulting, customer support and training. Our service revenues declined by 14%
to $4.7 million in 2003, $5.5 million in 2002 and by 37% in 2002 from $8.8
million in 2001. The decrease in service revenues was primarily due to lower
revenues from technical support contracts and a reduced level of consulting
services performed. Service revenues represented 51% of total revenues for 2003,
38% of total revenues for 2002 and 45% for 2001.
INTERNATIONAL REVENUES. International revenues were $3.8 million for 2003
and $4.8 million for 2002, representing a decrease of 21%. The decrease in
international revenues from 2002 to 2003 was primarily attributable to
unfavorable global economic conditions. International revenues declined by 35%
in 2002 from $7.4 million in 2001. The decrease in international revenues from
2001 to 2002 was primarily attributable to a general downturn in local economic
conditions in Asia, which in turn contributed to our decision to close our sales
office in Asia.
COST OF REVENUES
% CHANGE % CHANGE
-------- --------
2003 2002 - 2003 2002 2001 - 2002 2001
------------ ----------- ------------ ------------ ------------
License............................................ $ 90 (69) $ 286 1,943 $ 14
Service............................................ 1,625 (41) 2,740 (31) 3,973
--------- --------- ---------
Total cost of revenues........................... 1,715 (43) 3,026 (24) 3,987
--------- --------- ---------
Gross profit....................................... $ 7,583 (34)% $ 11,560 (25)% $ 15,384
14
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 2003. Our cost of license
revenues was $90,000 for 2003, $286,000 for 2002 and $14,000 for 2001. Cost of
license revenues was higher in 2002 due to payment of an aggregate of $274,000
in royalties to Isocra, Ltd. and Sun Microsystems because we sold more software
that required payment of royalties. Cost of license revenues as a percentage of
license revenues may vary between periods due to royalty charges from third
party software vendors.
COST OF SERVICE REVENUES. Cost of service revenues consists of personnel,
contractors and other costs related to the provision of professional services,
technical support and training. Our cost of service revenues declined by 41% to
$1.6 million for 2003 from $2.7 million in 2002 and by 31% in 2002 from $4.0
million in 2001. This decrease in 2003 from 2002 was primarily due to a $941,000
reduction in staffing and personnel related costs and a $119,000 reduction in
costs associated with our use of external consultants. The decrease in 2002 from
2001 was primarily due to a $1.1 million reduction in our use of external
consultants in 2002 as a result of the decline in both our technical support and
consulting service contracts. As a percentage of service revenues, cost of
service revenues was 34% for 2003, 50% for 2002 and 45% for 2001. Cost of
service revenues as a percentage of service revenues may vary between periods
due to our use of consultants.
OPERATING EXPENSES
% CHANGE % CHANGE
-------- --------
2003 2002 - 2003 2002 2001 - 2002 2001
------------ ----------- ------------ ------------ -----------
Sales and marketing.............................. $ 5,124 (41)% $ 8,676 (40)% $ 14,371
Research and development......................... 2,959 (28) 4,108 (26) 5,578
General and administrative....................... 2,419 (30) 3,459 (37) 5,519
Purchased intangibles............................ (225) (129) 768 (79) 3,634
Restructuring costs.............................. -- -- -- (100) 1,673
---------- ------- ---------- ----------
Total operating expenses....................... $ 10,277 (40) $ 17,011 (45) $ 30,775
---------- ------- ---------- ----------
SALES AND MARKETING. Sales and marketing expenses consist of salaries,
benefits, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses declined by 41% to $5.1 million for 2003 as compared to $8.7 million in
2002 and by 40% in 2002 from $14.4 million in 2001. The decrease in 2003 from
2002 was primarily due to a $2.4 million reduction in staffing and personnel
related costs, a decrease of $714,000 in commissions expensed due to lower
revenues as compared to 2002, and a $396,000 reduction in marketing and
promotional expenses. The decrease in 2002 from 2001 was primarily due to a
reduction in staffing and personnel related costs of $3.0 million, a $1.8
million reduction in commissions expensed based on lower sales revenues and a
reduction in office space and rent which lowered expenses by $256,000. Sales and
marketing expenses represented 55% of total revenues for 2003, 59% of total
revenues for 2002 and 74% of total revenues for 2001. We are presently targeting
that 2004 sales and marketing expense levels will be lower than comparable 2003
expense levels because as of December 2003 we had 13 sales and marketing
employees as compared to an average of 22 such employees during 2003.
RESEARCH AND DEVELOPMENT. Research and development expenses consist of
salaries and benefits for software developers, technical managers and quality
assurance personnel as well as payments to external software consultants. Our
research and development expenses declined by 28% to $3.0 million in 2003 as
compared to $4.1 million in 2002 and by 26% in 2002 from $5.6 million in 2001.
The decrease in 2003 from 2002 was primarily due to a $1.0 million reduction in
staffing and personnel related costs. The decrease in 2002 from 2001 was
primarily related to a reduction in both employees and external contract staff,
which resulted in a $1.3 million reduction in expenses. Research and development
expenses represented 32% of total revenues for 2003, 28% of total revenues for
2002 and 29% of total revenues in 2001. We are presently targeting that 2004
research and development expense levels will be lower than comparable 2003
expense levels because as of December 2003 we had 17 research and development
employees as compared to an average of 22 such employees during 2003.
15
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
salaries, benefits and related costs for our finance, administrative and
executive management personnel, legal costs, accounting costs, bad debt
write-offs and various costs associated with our status as a public company. Our
general and administrative expenses declined by 30% in 2003 to $2.4 million from
$3.5 million in 2002, and by 37% in 2002 from $5.5 million in 2001. The decrease
in 2003 from 2002 was primarily due to $398,000 reduction in bad debt expenses
and a $243,000 reduction in staffing and personnel related costs. The decrease
in 2002 from 2001 was primarily due to $625,000 reduction in legal fees and
$598,000 reduction in bad debt expenses. General and administrative expenses
represented 26% of total revenues for 2003, 24% of total revenues for 2002 and
28% of total revenues for 2001. We are presently targeting that 2004 general and
administrative expense levels will be lower than comparable 2003 expense levels
because as of December 2003 we had 9 general and administrative employees as
compared to an average of 11 such employees during 2003.
PURCHASED INTANGIBLES. Purchased intangibles expenses were ($225,000) for
2003, $768,000 for 2002 and $3.6 million for 2001. In December 2003, we
determined that we would not need to pay a previously accrued expense of
$225,000 related to purchased technology and accordingly it was reversed. There
was no amortization of purchased intangibles for 2003 as such costs, which were
$64,000, are now classified as a cost of license revenues. In 2002, write-offs
of purchased intangibles were $160,000. In 2001, write-offs of intangibles and
goodwill were $2.0 million. The write-offs pertained to both software purchased
from third parties and goodwill from companies that had been acquired. These
assets were deemed to have become impaired due to various factors including the
availability of alternative software solutions and the product transition from
our older POWERTIER application server product to our newer EDGEXTEND data
services product.
RESTRUCTURING COSTS. Restructuring costs consist of expenses associated with
a reduction in employee headcount and the closure of field offices. In 2003 and
2002, no restructuring costs were incurred. We restructured several functions
during 2001, which resulted in a one-time charge of $1.7 million. The majority
of this charge was related to severance and other employee related benefit
costs.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense)
consists 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 $5,000
for 2003, $45,000 for 2002 and $325,000 for 2001. The decrease in income was
primarily due to a reduction in interest income yielded from our lower cash
balances.
STOCK-BASED COMPENSATION. Some options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value of
the stock price for accounting purposes was greater than the fair market value
of the stock as determined by the Board of Directors on the date of grant or
issuance. We had no deferred stock compensation associated with equity
transactions as of December 31, 2003 and $31,000 as of December 31, 2002, net of
amortization. Deferred stock compensation was amortized ratably over the vesting
periods of these securities. Amortization expense, which is included in
operating expenses, was $31,000 in 2003, $88,000 in 2002 and $245,000 in 2001.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
As of December 31, 2003, we had $60.0 million of federal and $13.1 million
of state net operating loss carryforwards available to offset future taxable
income. The federal net operating loss carryforwards expire through 2022, while
the state net operating loss carryforwards expire through 2013. As of December
31, 2002, we had $55.9 million of federal and $8.6 million of state net
operating loss carryforwards available to offset future taxable income. The
federal net operating loss carryforwards expire through 2022, while the state
net operating loss carryforwards expire through 2012. The net operating loss
carryforwards for state tax purposes are substantially less than for federal tax
purposes, primarily because only 50% of state net operating loss carryforwards
can be utilized to offset future state taxable income and because state net
operating loss carryforwards generated in earlier years have already expired.
The Tax Reform Act of 1986 limits the use of net operating loss carryforwards in
situations where changes occur in the stock ownership of a company. If we should
be acquired or otherwise have an ownership change, as defined in the Tax Reform
Act of 1986, our utilization of these carryforwards could be restricted.
16
As of December 31, 2003, the Company also had research and development tax
credit carryforwards of $1.8 million and $1.4 million available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires in 2023, while the state credit carryforward has no expiration. As of
December 31, 2002, we had research and development tax credit carryforwards of
$1.7 million and $1.6 million available to offset future federal and state
income taxes, respectively. The federal credit carryforward expires in 2022,
while the state credit carryforward has no expiration.
We have placed a full valuation allowance against our net deferred tax
assets due to the uncertainty surrounding the realization of these assets. 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
The following table sets forth unaudited consolidated statement of
operations data for each of the twelve quarters in the three-year period ended
December 31, 2003. This financial data is also expressed as a percentage of our
total revenues for the periods indicated. This data has been derived from our
unaudited consolidated financial statements, which have been prepared on the
same basis as the audited consolidated financial statements and, in the opinion
of our management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information when read in
conjunction with the consolidated financial statements and notes thereto. Our
quarterly results have been in the past, and may be in the future, subject to
significant fluctuations. As a result, we believe that results of operations for
interim periods should not be relied upon as any indication of the results to be
expected in any future period.
17
QUARTER ENDED
---------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
2002 2002 2002 2002 2003 2003 2003 2003
-------- -------- -------- -------- -------- -------- -------- --------
(UNAUDITED, IN THOUSANDS, EXCEPT PERCENTAGE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License................ $ 833 $ 4,104 $ 2,825 $ 1,299 $ 1,294 $ 1,656 $ 722 $ 888
Service................ 1,328 1,626 1,319 1,252 1,229 1,220 1,084 1,205
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues....... 2,161 5,730 4,144 2,551 2,523 2,876 1,806 2,093
-------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
License................ 27 75 75 109 39 22 25 4
Service................ 768 759 691 522 477 459 395 294
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues 795 834 766 631 516 481 420 298
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 1,366 4,896 3,378 1,920 2,007 2,395 1,386 1,795
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 2,434 2,586 1,848 1,807 1,531 1,545 1,228 820
Research and development 1,118 1,038 1,040 912 849 803 732 575
General and
administrative........ 927 919 798 815 643 657 631 488
Purchased intangibles.. 212 142 126 289 -- -- -- (225)
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses............ 4,691 4,685 3,812 3,823 3,023 3,005 2,591 1,658
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations.............. (3,325) 211 (434) (1,903) (1,016) (610) (1,205) 137
Interest income......... 35 21 20 18 19 16 8 7
Interest and other expense (12) (14) (27) 4 (11) (11) (12) (11)
-------- -------- -------- -------- -------- -------- -------- --------
Income/(Loss) before
income taxes............ (3,302) 218 (441) (1,881) (1,008) (605) (1,209) 133
Income taxes............ (7) (3) (8) (16) -- (19) (4) 6
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $(3,309) $ 215 $ (449) $(1,897) $(1,008) $ (624) $(1,213) $ 139
======== ======== ======== ======== ======== ======== ======== ========
Shares used in calculating
basic net income (loss)
per share 2,009 2,015 2,020 2,168 2,403 2,406 2,409 2,507
======== ======== ======== ======== ======== ======== ======== ========
Shares used in
calculating diluted
net income (loss) per
share.................. 2,009 2,049 2,020 2,168 2,403 2,406 2,409 2,533
======== ======== ======== ======== ======== ======== ======== ========
Basic net income (loss)
per share $ (1.65) $ 0.11 $ (0.22) $ (0.88) $ (0.42) $ (0.26) $ (0.50) $ 0.06
======== ======== ======== ======== ======== ======== ======== ========
Diluted net income (loss)
per share............... $ (1.65) $ 0.10 $ (0.22) $ (0.88) $ (0.42) $ (0.26) $ (0.50) $ 0.05
======== ======== ======== ======== ======== ======== ======== ========
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License................ 38.5% 71.6% 68.2% 50.9% 51.3% 57.6% 40.0% 42.4%
Service................ 61.5 28.4 31.8 49.1 48.7 42.4 60.0 57.6
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues....... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
License................ 1.2 1.3 1.8 4.3 1.5 0.8 1.4 0.2
Service................ 35.5 13.2 16.7 20.5 18.9 16.0 21.9 14.0
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues 36.7 14.5 18.5 24.8 20.4 16.8 23.3 14.2
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin............ 63.3 85.5 81.5 75.2 79.6 83.2 76.7 85.8
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 112.6 45.1 44.6 70.8 60.7 53.7 68.0 39.2
Research and development 51.7 18.1 25.1 35.8 33.7 27.9 40.5 27.5
General and
administrative........ 42.9 16.0 19.3 31.9 25.5 22.8 34.9 23.3
Purchased intangibles.. 9.8 2.5 3.0 11.3 -- -- -- (10.8)
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses............ 217.0 81.7 92.0 149.8 119.9 104.4 143.4 79.2
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations.............. (153.7) 3.8 (10.5) (74.6) (40.3) (21.2) (66.7) 6.6
Interest income......... 1.6 0.4 0.5 0.7 0.8 0.6 0.4 0.3
Interest and other expense (0.6) (0.2) (0.7) 0.2 (0.4) (0.4) (0.7) (0.5)
-------- -------- -------- -------- -------- -------- -------- --------
Income/(loss) before
income taxes............ (152.7) 4.0 (10.7) (73.7) (39.9) (21.0) (67.0) 6.4
Income taxes............ (0.3) (0.1) (0.2) (0.6) -- (0.7) (0.2) 0.3
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... (153.0)% 3.9% (10.9)% (74.3)% (39.9)% (21.7)% (67.2)% 6.7%
========= ======== ========= ========= ========= ========= ========= ========
18
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had $5.7 million of cash and cash equivalents as
compared to $8.9 million as of December 31, 2002.
Net cash used in operating activities was $3.9 million in 2003, as compared
to a net cash provided from operating activities of $113,000 in 2002. The main
reasons for the increase in net cash used in operating activities in 2003 was
our continued net operating losses during 2003.
Net cash used in investing activities was not significant in 2003.
Net cash provided by financing activities was $660,000 in 2003, which
consisted of $1.0 million in proceeds primarily from our private placement of
stock and warrants, offset by $345,000 in loan and capital lease repayments.
Net cash provided by operating activities was $113,000 in 2002, while net
cash used in operating activities was $11.6 million in 2001. This increase in
provision of net cash from operating activities was mainly driven by an
improvement in our net loss position.
Net cash used in investing activities was $325,000 in 2002, mainly as the
result of the purchase of property and equipment and acquisitions of technology,
while net cash provided by investing activities was $5.4 million in 2001, mainly
from the sale of short-term investments.
Net cash provided by financing activities was $1.7 million in 2002, which
consisted of $2.0 million in proceeds primarily from our private placement of
stock and warrants offset by $329,000 in loan repayments. This compares to net
cash provided by financing activities of $500,000 in 2001.
We have a revolving credit facility with Comerica Bank of up to $1.5 million
which is available through April 30, 2004 under which no borrowings were
outstanding as of December 31, 2003. We also have a $149,000 equipment term
loan, under which $59,000 was outstanding as of December 31, 2003. This facility
is an 18 month term loan with principal payments of $8,229 per month beginning
on February 1, 2003 plus interest at the bank's base rate plus 1% per annum. As
of December 31, 2003 we were not in compliance with our debt covenants, and the
bank waived this non-compliance for the fourth quarter of 2003. On February 18,
2004 we revised our covenant structure with the bank. The new covenants require
us, among other things, to maintain certain working capital and profitability
covenants. We expect to meet these covenants if we are able to achieve our
target revenues. Borrowings under the facility are collateralized by
substantially all of our assets.
Currently we have no material commitments for capital expenditures nor do we
anticipate a material increase in capital expenditures and lease commitments.
We are currently targeting that our current cash and cash equivalents will
be sufficient to meet our anticipated cash needs through at least December 31,
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.
19
CONTRACTUAL OBLIGATIONS
Payments Due by Period
----------------------
Less than 1
Contractual Obligations Total Year 1-3 Years
- ---------------------------------- ----- -------------- ---------
(in thousands)
Lines of Credit $ -- $ -- $ --
Equipment term loan 59 59 --
Long term debt 279 270 9
Capital leases 19 8 11
Operating leases 726 664 62
------- --------- -------
Total contractual obligations $ 1,083 $ 1,001 $ 82
======= ========= =======
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, BUSINESS COMBINATIONS and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will rather be tested at least
annually for impairment. We adopted SFAS No. 142 for the fiscal year beginning
January 1, 2002. The impact of adopting this standard was not material to our
financial statements as we did not carry any goodwill or intangible assets.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force ("EITF") Issue No. 94-3. 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. The adoption of SFAS No. 146 on
January 1, 2003 did not have a material effect on our consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING FOR DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS. The adoption of this standard did not have
an impact on our consolidated financial statements.
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. The adoption of EITF 00-21 did not have a
material impact on our financial position or results of operations.
In 2003 the FASB issued FIN 46, Consolidation of Variable Interest Entities,
and several revisions (collectively FIN 46). These statements address
consolidation of variable interest entities and we do not expect the adoption to
have an effect on our consolidated financial statements. In December 2003 the
SEC issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition. The
adoption of SAB No. 104 did not have an effect on our consolidated financial
statements.
20
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.
Our target customers are those data- and transaction-intensive companies
that are either building a new project or re-architecting their current system
in order improve their data management performance. Thus, anything that would
cause these target customers to defer these projects, such as constrained
budgets, will negatively affect our product sales. In addition, our ability to
achieve our sales targets are affected by:
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 EDGEXTEND and DIRECTALERT;
o our dependence for revenue from our POWERTIER product, which was first
introduced in 1997 and has achieved only limited market acceptance;
o our need to expand our distribution capability through various sales
channels, including a direct sales organization, original equipment
manufacturers, third party distributors, independent software vendors
and systems integrators;
o our unproven ability to anticipate and respond to technological and
competitive developments in the rapidly changing market for dynamic data
management;
o our unproven ability to compete in a highly competitive market;
o the decline in spending levels in the software infrastructure market;
o our dependence upon key personnel.
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 are currently targeting that our current cash and cash
equivalents will be sufficient to meet our anticipated cash needs through at
least December 31, 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, or 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.
21
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 introduction of new products or services by us or our competitors;
o annual or quarterly budget cycles of our customers or prospective
customers;
o the level of product and price competition in the application server and
data management markets;
o our lengthy sales cycle;
o our success in maintaining our direct sales force and expanding indirect
distribution channels;
o the mix of direct sales versus indirect distribution channel sales;
o the possible loss of sales people;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in penetrating international markets and general economic
conditions in these markets.
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.
22
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
PERIOD OF TOP 2 CUSTOMERS OF TOP 5 CUSTOMERS
------ ------------------ ------------------
Year ended December 31, 2003 46% Citigroup Global Markets............21%
Adobe Systems.........................9
Year ended December 31, 2002 55 Cablevision..........................26
Citigroup Global Markets.............13
Year ended December 31, 2001 45 Citigroup Global Markets.............15
Cablevision..........................11
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. In addition, because a substantial portion of our revenues result
from product sales to a limited number of customers, the identity of which
change from quarter to quarter, in any given quarter the percentage contribution
of POWERTIER, EDGEXTEND and DIRECTALERT to total license revenues varies,
sometimes dramatically.
DECLINES IN SALES REVENUE MAY RESTRICT OUR GROWTH AND HARM OUR BUSINESS AND OUR
ABILITY TO ACHIEVE OUR FINANCIAL OBJECTIVES.
We have experienced substantial sales declines beginning in 2001. In 2001
our revenues declined from the previous year by 23%, in 2002 our revenues
declined by 25% and in 2003 our revenues declined by 36%. 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. Our target customers are those data- and transaction-intensive
companies that are either building a new project or re-architecting their
current system in order improve their data management performance. Thus,
anything that would cause these target customers to defer these projects, such
as constrained budgets, will negatively affect our product sales. 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.
23
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, our EDGEXTEND for
..NET product was released in October 2002 and our EDGEXTEND for Linux was
released in March 2003. 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.
Typically, 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.
In addition, in connection with our workforce reductions in the third and fourth
quarters of 2003, we reduced our sales and marketing staff from 22 employees at
the beginning of 2003 to 13 employees as of December 31, 2003. As a result of
our employee turnover and headcount reductions, we may not meet our sales goals.
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.
24
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.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE
HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The markets for our products are intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our markets are:
o performance, including scalability, integrity and availability;
o ability to provide a competitive return on investment to the customer;
o flexibility;
o use of standards-based technology (e.g. J2EE);
o ease of integration with customers' existing enterprise systems;
o ease and speed of implementation;
o quality of support and service;
o security;
o company reputation and perception of viability; and
o price.
In the EDGEXTEND market, alternative technology is available from a variety
of sources. Companies such as Versant, Gemstone and Progress Software 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.
25
In the POWERTIER market, our competitors include both publicly and
privately-held enterprises, including BEA Systems (WebLogic), IBM (WebSphere),
Oracle (OAS) 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.
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.
26
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 40% of our total revenues
came from sales of products and services outside of the United States for the
three months ended December 31, 2003. 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;
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.
27
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 February 29, 2004, we had approximately 2,713,918
shares of common stock outstanding. Virtually all of our shares, other than
shares held by affiliates, are freely tradable. Shares held by affiliates are
tradable, subject to volume and other restrictions of Rule 144. These sales of
common stock could impede our ability to raise funds at an advantageous price,
or at all, through the sale of securities.
IF OUR STOCKHOLDERS' EQUITY FALLS BELOW $2.5 MILLION, OUR STOCK COULD BE
DELISTED FROM NASDAQ SMALLCAP MARKET.
Our stockholders' equity as of December 31, 2003 was $3.0 million, which is
in excess of the $2.5 million minimum stockholders' equity requirement for
listing on the Nasdaq SmallCap Market. However, if we do not achieve our target
revenues, we may incur additional net losses, which would result in a decrease
in our stockholders' equity. If our stockholders' equity falls below $2.5
million, our stock could be subject to delisting by Nasdaq, in which case our
stock would trade on the OTC "bulletin board." Delisting of our stock from the
Nasdaq SmallCap Market could reduce the liquidity in the market for our stock
and negatively impact our reputation and consequently our business.
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;
28
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 were in default of the tangible net worth covenant in our loan agreement
with Comerica Bank at December 31, 2003, and the bank waived this non compliance
for the fourth quarter of 2003. This covenant required that we maintain defined
tangible net worth. We have not been able to comply with the covenants of our
line of credit with Comerica Bank in the past, and we may not be able to be in
compliance with our financial covenants in our loan agreement with the bank in
the future if we fail to meet our revenue targets or continue to have net
losses. On February 18, 2004, we revised our covenant structure with the bank.
This new structure requires us, among other things, to maintain certain working
capital and profitability covenants. We expect to meet these covenants if we are
able to achieve our target revenues. Borrowings under the facility are
collateralized by substantially all of our assets. 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 ANTI-TAKEOVER 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:
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.
29
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY. Our operating results are sensitive to changes in
the general level of U.S. interest rates. If market interest rates had changed
by ten percent in 2003, our operating results would not have changed materially.
As of December 31, 2003, most of our cash equivalents were invested in money
market accounts and, thus, the principal values are not susceptible to changes
in short-term interest rates.
FOREIGN CURRENCY FLUCTUATIONS. We have certain operating transactions in
foreign currencies, and maintain balances that are due or payable in foreign
currencies at December 31, 2003. We estimate that a hypothetical ten percent
change in foreign currency rates in 2003 would not have impacted our financial
results of operations materially. We do not hedge any of our foreign currency
exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 15(a) of Part IV of this Annual Report on Form 10-K for an index to
the consolidated financial statements and supplementary data that are attached
hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on our
management's evaluation (with the participation of our principal executive
officer and principal financial officer) as of the end of the period covered by
this Annual Report on Form 10-K, our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) are effective to ensure that information
required to be disclosed by us in reports that we file, or submit, under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms.
(b) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no
change in our internal control over financial reporting during the year ended
December 31, 2003 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Internal control over financial reporting consists of control processes
designed to provide assurance regarding the reliability of financial reporting
and the preparation of our financial statements in accordance with GAAP. To the
extent that components of our internal control over financial reporting are
included in our disclosure controls, they are included in the scope of the
evaluation by our chief executive officer and chief financial officer referenced
above.
30
PART III
ITEMS 10, 11 AND 12.
The Company's Proxy Statement for its Annual Meeting of Stockholders for the
year ended December 31, 2003, when filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, is incorporated by reference in this Annual
Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K and
provides the information required under Items 10 and 11 of Part III, except for
the information with respect to the Company's executive officers, which is
included in "Item 1. Business -- Executive Officers of the Registrant".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the
section of our proxy statement entitled "Principal Accounting Fees and
Services."
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this annual report:
(1) FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT (pages F-1
through F-18):
Audited Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 2003,
2002 and 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULE (pages S-1 through S-3)
Audited Consolidated Financial Statement Schedule:
Independent Auditors' Report
Schedule II -- Consolidated Schedule of Valuation and Qualifying
Accounts for the years ended December 31, 2003, 2002 and 2001
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
31
(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
(b) Reports on Form 8-K. Two reports on Form 8-K were filed on October 17,
2003 and December 9, 2003 during the quarter ended December 31, 2003
reporting matters under Item 5 (Other Events), and Item 7 (Financial
Statements Pro Forma Financial Information and Exhibits).
32
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.2 (1) Amended and Restated Certificate of Incorporation of
Persistence.
3.4 (7) Amended and Restated Bylaws of Persistence, as amended on
February 12, 2003.
4.1 (1) Specimen Stock Certificate.
4.2 (2) Common Stock Warrant, Warrant No. W-CS1, dated June 28,
2001, issued to RCG Capital Markets Group, Inc.
4.3 (8) Common Stock Warrant, Warrant No W-CS-2, dated October 18,
2002, issued to RTX Securities Corporation.
10.1 (1) Form of Common Stock Purchase Agreement between Persistence
and each of Christopher T. Keene and Derek P. Henninger.
10.2 (1) Fifth Amended and Restated Investor Rights Agreement dated
February 19, 1999 among Persistence and certain investors.
10.5 (1) 1994 Stock Purchase Plan (as amended) and Form of Common
Stock Purchase Agreement.
10.6 (7) 1997 Stock Plan (as amended) and Forms of Stock Option
Agreement and Common Stock Purchase Agreement.
10.7 (7) 1999 Employee Stock Purchase Plan and Form of Subscription
Agreement.
10.8 (7) 1999 Directors' Stock Option Plan and Form of Option
Agreement.
10.9 (1) Lease dated June 12, 1991 between Persistence and Great
American Bank (as amended).
10.10 (1)+ Settlement and License Agreement dated March 23, 1998
between Persistence and Sun Microsystems, Inc.
10.11 (1) Form of Indemnification Agreement between Persistence and
officers and directors.
10.12 (2) Registration Rights Agreement dated as of June 28, 2001
between Persistence and RCG Capital Markets Group, Inc.
10.13 (3) Amended and Restated Loan Agreement between Persistence and
Comerica Bank dated March 6, 2002.
10.14 (3) Lease Amendment dated February 5, 2002 between Persistence
and Cornerstone Properties I, LLC.
10.15 (3) Form of Change of Control Agreement between Persistence and
each of Keith Zaky and Ed Murrer.
10.16 (4) First Amendment to Loan and Security Agreement between
Persistence and Comerica Bank dated May 6, 2002.
10.17 (5) Second Amendment to the Restated Loan and Security
Agreement between Persistence and Comerica Bank dated
July 3, 2002.
10.18 (5) Third Amendment to the Restated Loan and Security Agreement
between Persistence and Comerica Bank dated July 17, 2002.
10.19 (6) Common Stock Purchase Agreement dated as of November 26,
2002 by and between Persistence Software, Inc. nd Needham
Capital Partners III, L.P., Needham Capital Partners IIIA,
L.P. and Needham Capital Partners III (Bermuda), L.P.
10.20(6) Registration Rights Agreement dated as of November 26,
2002 by and between Persistence Software, Inc. and Needham
Capital Partners III, L.P., Needham Capital Partners IIIA,
L.P. and Needham Capital Partners III (Bermuda), L.P.
10.21 (6) Voting Agreement dated as of November 26, 2002 by and
between Persistence Software, Inc., Christopher T.
Keene and Needham Capital Partners III, L.P., Needham
Capital Partners IIIA, L.P. and Needham Capital
Partners III (Bermuda), L.P.
10.22 (6) Form of Common Stock Warrant dated as of November 26, 2002
issued to Needham Capital Partners III, L.P., Needham
Capital Partners IIIA, L.P. and Needham Capital Partners
III (Bermuda), L.P.
10.23 (7) Fourth Amendment to the Restated Loan and Security
Agreement between Persistence and Comerica Bank dated
November 15, 2002.
33
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.23a (8) Registration Rights Agreement dated as of October 18, 2002
between Persistence and RTX Securities Corporation.
10.24 (7) Amended and Restated Loan Agreement between Persistence and
Comerica Bank dated March 20, 2003.
10.25 (9) Amendment No. 1 to Amended and Restated Loan and Security
Agreement between Persistence Software, Inc. and Comerica
Bank.
10.26 (10) Common Stock Purchase Agreement dated as of November 25,
2003 by and among Persistence Software, Inc. and certain
investors.
10.27 (10) Registration Rights Agreement dated as of December 1, 2003
by and among Persistence Software, Inc. and certain
investors.
10.28 (10) Form of Common Stock Warrant dated as of December 1, 2003
issued to certain investors.
10.29 (10) Form of Common Stock Warrant dated as of December 1, 2003
issued to Security Research Associates, Inc.
Amendment No. 2 to Amended and Restated Loan and Security
10.30 Agreement between Persistence Software, Inc. and Comerica
Bank.
21.1 (1) List of Subsidiaries.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney (see page 37).
31.1 Certificate of Chief Executive Officer, pursuant to Rule
13a-14(a).
31.2 Certificate of Chief Financial Officer, pursuant to Rule
13a-14(a).
32.1 Certificate of Chief Executive Officer, pursuant to
18U.S.C. Section 1350.
32.2 Certificate of Chief Financial Officer, pursuant to
18U.S.C. Section 1350.
- ----------
(1) Incorporated herein by reference to our Registration Statement on Form
S-1 (Commission File No. 333-76867).
(2) Incorporated herein by reference to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.
(3) Incorporated herein by reference to our Annual Report on Form 10-K for
the year ended December 31, 2001.
(4) Incorporated herein by reference to our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002.
(5) Incorporated herein by reference to our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002.
(6) Incorporated herein by reference to our Current Report on Form 8-K
filed on November 27, 2002.
(7) Incorporated herein by reference to our Annual Report on Form 10-K for
the year ended December 31, 2002.
(8) Incorporated herein by reference to our Registration Statement on Form
S-3 (Commission File No. 333-104878).
(9) Incorporated herein by reference to our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003.
34
(10) Incorporated herein by reference to our Current Report on Form 8-K
filed with the SEC on December 9, 2003.
+ Certain information in this Exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been granted
with respect to the omitted portions.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K for the fiscal year ended December 31, 2003 to be signed on its behalf by
the undersigned, thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ CHRISTOPHER T. KEENE
-------------------------------------------------
Christopher T. Keene
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
By: /s/ BRIAN TOBIN
-------------------------------------------------
Brian Tobin
ACTING CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer)
Date: March 29, 2004
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Christopher T. Keene and Brian Tobin, jointly and
severally, his or her attorneys-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this Report
on Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CHRISTOPHER T. KEENE Chairman of the Board and Chief Executive March 29, 2004
- ----------------------------------------- Officer (Principal Executive Officer)
Christopher T. Keene
/s/ BRIAN TOBIN Acting Chief Financial Officer (Principal March 29, 2004
- ----------------------------------------- Financial and Accounting Officer)
Brian Tobin
/s/ LAWRENCE OWEN BROWN Director March 29, 2004
- -----------------------------------------
Lawrence Owen Brown
/s/ THOMAS SHANAHAN Director March 29, 2004
- -----------------------------------------
Thomas Shanahan
/s/ SANJAY VASWANI Director March 29, 2004
- -----------------------------------------
Sanjay Vaswani
36
PERSISTENCE SOFTWARE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 2003 and 2002................ F-3
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001..................................... F-4
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 2003,
2002 and 2001........................................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001..................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Persistence Software, Inc.:
We have audited the accompanying consolidated balance sheets of Persistence
Software, Inc. and its subsidiaries (the "Company") as of December 31, 2003 and
2002, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive loss, and cash flows for each of the
three years in the period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
March 29, 2004
F-2
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
ASSETS
DECEMBER 31,
-------------------------
2003 2002
----------- -----------
Current assets:
Cash and cash equivalents................................................................. $ 5,680 $ 8,903
Accounts receivable, net of allowances of $74 and $220, respectively...................... 1,498 1,252
Prepaid expenses and other current assets................................................. 258 392
----------- -----------
Total current assets................................................................. 7,436 10,547
Property and equipment, net................................................................. 95 375
Purchased intangibles, net of amortization of $848 and $785, respectively................... 59 123
Other assets................................................................................ 37 55
----------- -----------
Total assets......................................................................... $ 7,627 $ 11,100
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 329 $ 325
Accrued compensation and related benefits................................................. 338 722
Other accrued liabilities................................................................. 924 1,188
Deferred revenues, net of long-term portion............................................... 2,565 2,529
Current portion of long-term obligations.................................................. 334 841
----------- -----------
Total current liabilities............................................................ 4,490 5,605
Long-term liabilities
Long-term portion of deferred revenues.................................................... 84 691
Long-term obligations..................................................................... 18 93
----------- -----------
Total long-term liabilities.......................................................... 102 784
----------- -----------
Total liabilities.................................................................... 4,592 6,389
----------- -----------
Commitments (Note 5)
Stockholders' equity:
Preferred stock, $0.001 par value; authorized-- 5,000,000 shares; designated and
outstanding--none........................................................................ -- --
Common stock, $0.001 par value; authorized -- 75,000,000 shares; outstanding -- 2003,
2,710,617 shares; 2002, 2,398,994 shares................................................. 67,112 66,103
Deferred stock compensation............................................................... -- (31)
Accumulated deficit....................................................................... (64,076) (61,370)
Accumulated other comprehensive income.................................................... (1) 9
----------- -----------
Total stockholders' equity........................................................... 3,035 4,711
----------- -----------
Total liabilities and stockholders' equity........................................... $ 7,627 $ 11,100
=========== ===========
See notes to consolidated financial statements.
F-3
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
2003 2002 2001
----------- ----------- --------
Revenues:
License..................................................................... $ 4,560 $ 9,061 $ 10,561
Service..................................................................... 4,738 5,525 8,810
----------- ----------- -----------
Total revenues......................................................... 9,298 14,586 19,371
----------- ----------- -----------
Cost of revenues:
License..................................................................... 90 286 14
Service..................................................................... 1,625 2,740 3,973
----------- ----------- -----------
Total cost of revenues................................................. 1,715 3,026 3,987
----------- ----------- -----------
Gross profit.................................................................. 7,583 11,560 15,384
Operating expenses:
Sales and marketing......................................................... 5,124 8,676 14,371
Research and development.................................................... 2,959 4,108 5,578
General and administrative.................................................. 2,419 3,459 5,519
Purchased intangibles....................................................... (225) 768 3,634
Restructuring costs......................................................... -- -- 1,673
----------- ----------- -----------
Total operating expenses............................................... 10,277 17,011 30,775
----------- ----------- -----------
Loss from operations.......................................................... (2,694) (5,451) (15,391)
Interest income............................................................... 50 94 394
Interest and other expense.................................................... (45) (49) (69)
----------- ----------- -----------
Loss before income taxes...................................................... (2,689) (5,406) (15,066)
Income taxes.................................................................. (17) (34) (66)
----------- ----------- -----------
Net loss...................................................................... $ (2,706) $ (5,440) $ (15,132)
=========== =========== ===========
Basic and diluted loss per share.............................................. $ (1.11) $ (2.65) $ (7.60)
=========== =========== ===========
Shares used in calculating basic and diluted net income/(loss) per share...... 2,432 2,053 1,992
=========== =========== ===========
See notes to consolidated financial statements.
F-4
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES ACCUMULATED
COMMON STOCK DEFERRED RECEIVABLE OTHER TOTAL
-------------------- STOCK FROM ACCUMULATED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT COMPENSATION STOCKHOLDERS DEFICIT (LOSS)/INCOME TOTAL LOSS
---------- --------- ------------ ------------- ------- ------------- --------- ------------
Balances, January 1, 2001.... 1,987,870 $ 63,994 $ (592) $ (94) $(40,798) $ 46 $ 22,556
Net loss..................... (15,132) (15,132) $ (15,132)
Cumulative translation
adjustment................. (35) (35) (35)
----------
Comprehensive loss........... $ (15,167)
==========
Issuance of common stock, net
of repurchases............. 15,787 270 270
Collection of notes receivable
from stockholders.......... 40 40
Issuance of stock warrants... 53 (53)
Reversal of stock arrangements
due to cancellations....... (281) 281
Amortization of deferred stock
compensation............... 245 245
---------- --------- --------- -------- --------- -------- ---------
Balances, December 31, 2001.. 2,003,657 64,036 (119) (54) (55,930) 11 7,944
Net loss..................... (5,440) (5,440) $ (5,440)
Cumulative translation
adjustment................. (2) (2) (2)
----------
Comprehensive loss........... $ (5,442)
==========
Issuance of common stock from
employee stock option
exercises and the employee
stock purchase plan........ 19,468 95 95
Issuance of common stock and
common stock warrants, in
connection with a
common stock purchase
agreement.................. 375,869 1,930 1,930
Collection of notes receivable
from stockholders.......... 54 54
Issuance of stock options,
non-employees.............. 42 42
Amortization of deferred stock
compensation............... 88 88
---------- --------- --------- -------- --------- -------- ---------
Balances, December 31, 2002 2,398,994 66,103 (31) -- (61,370) 9 4,711
Cancellation of fractional
shares..................... (25) --
Net loss..................... (2,706) (2,706) $ (2,706)
Cumulative translation
adjustment................. (10) (10) (10)
----------
Comprehensive loss........... $ (2,716)
==========
Issuance of common stock from
employee stock option
exercises and the employee
stock purchase plan........ 11,648 32 32
Issuance of common stock and
common stock warrants, in
connection with a
common stock purchase
agreement.................. 300,000 973 973
Issuance of stock options,
non-employees.............. 4 4
Amortization of deferred stock
compensation............... 31 31
---------- --------- --------- -------- --------- -------- ---------
Balances, December 31, 2003 2,710,617 $ 67,112 $ -- $ -- $(64,076) $ (1) $ 3,035
========== ========= ========= ======== ========= ======== =========
See notes to consolidated financial statements.
F-5
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $ (2,706) $ (5,440) $ (15,132)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................ 371 1,198 2,275
Write-down of purchased intangibles.................................. -- 160 1,988
Release of obligation incurred to acquire purchased intangibles...... (225) -- --
Loss on sale of fixed assets......................................... -- 14 164
Amortization of deferred stock compensation.......................... 31 88 245
Issuance of stock warrants and options to non-employees.............. 4 42 --
Reserve for loss on lease liability.................................. -- 22 --
Changes in operating assets and liabilities:
Accounts receivable (net).......................................... (246) 2,854 3,015
Prepaid expenses and other current assets.......................... 134 264 175
Accounts payable................................................... 4 (745) (587)
Accrued compensation and related benefits.......................... (383) (171) (1,895)
Other accrued liabilities and other long-term liabilities.......... (277) 731 (1,274)
Deferred revenues.................................................. (571) 1,096 (558)
----------- ----------- -----------
Net cash provided by (used in) operating activities............. (3,864) 113 (11,584)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments............................ -- -- 5,387
Purchase of property and equipment...................................... (30) (176) (101)
Proceeds from sale of property and equipment............................ 3 -- 93
Acquisition of purchased intangibles.................................... -- (158) --
Deposits and other...................................................... 18 9 48
----------- ----------- -----------
Net cash provided by (used) in investing activities............. (9) (325) 5,427
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of repurchases and issuance costs............. 1,005 2,025 270
Collection of notes receivable from stockholders........................ -- 54 40
Repayment of capital lease obligations.................................. (14) (33) (43)
Repayment of obligations incurred to acquire purchased intangibles...... -- (160) (470)
Borrowing under loan agreement.......................................... -- 149 122
Repayment under loan agreements......................................... (331) (329) (419)
----------- ----------- -----------
Net cash provided by (used) in financing activities............. 660 1,706 (500)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.............. (10) (2) (35)
----------- ----------- -----------
CASH AND CASH EQUIVALENTS:
Net increase (decrease)................................................. (3,223) 1,492 (6,692)
Beginning of year....................................................... 8,903 7,411 14,103
----------- ----------- -----------
End of year............................................................. $ 5,680 $ 8,903 $ 7,411
=========== =========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment under capital leases.............. $ -- $ 18 $ --
=========== =========== ===========
Long-term obligations incurred to acquire purchased intangibles......... $ -- $ -- $ (150)
=========== =========== ===========
Reversal of compensatory stock arrangements due to cancellations........ $ -- $ -- $ 281
=========== =========== ===========
Compensatory stock arrangements......................................... $ -- $ -- $ (53)
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --CASH
PAID DURING THE YEAR FOR:
Interest ............................................................... $ 29 $ 44 $ 68
=========== =========== ===========
Income taxes............................................................ $ 17 $ 34 $ 66
=========== =========== ===========
See notes to consolidated financial statements.
F-6
PERSISTENCE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Persistence Data Services products sit between existing
databases - such as Oracle and D2 - and application servers such as BEA,
WebLogic, IBM, WebSphere, and Microsoft .NET providing a "data bridge" between
J2EE, .Net, Java and C++ applications. A data services layer is the code within
a customer application that accesses and updates a database rapidly; in fact it
is often termed "real-time" or zero latency. Business information is positioned
for more efficient access for users, reducing network traffic resulting in
improved application performance at a lower infrastructure cost.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
CASH EQUIVALENTS -- The Company considers all highly liquid debt instruments
purchased with remaining maturities of less than three months to be cash
equivalents.
PROPERTY AND EQUIPMENT are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of three
years. Leasehold improvements are amortized over the shorter of the lease term
or their useful life.
PURCHASED INTANGIBLES are stated at cost. Amortization is computed using the
straight-line method over the estimated useful lives of two to three years.
Purchased intangibles at December 31, 2003 were $59,000 net of amortization.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF --
The Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. In fiscal 2002, the Company determined that certain
intangible assets were impaired and recorded a write-down of $160,000. In fiscal
2001, the Company determined that certain intangible assets were impaired and
recorded a write-down of $2.0 million. Refer to Note 2.
SOFTWARE DEVELOPMENT COSTS -- Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional costs would be capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, COMPUTER SOFTWARE TO BE SOLD,
LEASED OR OTHERWISE MARKETED. Because the Company believes its current process
for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
REVENUE RECOGNITION -- Revenue consists primarily of fees for licenses of
the Company's software products, maintenance and customer support.
LICENSE REVENUE -- Revenue from software licenses is recognized upon
shipment of the software if collection of the resulting receivable is probable,
an executed agreement has been signed, the fee is fixed or determinable and
vendor-specific objective evidence exists to allocate a portion of the total fee
to any undelivered elements of the arrangement. Such undelivered elements in
these arrangements typically consist of services. For sales made through
distributors, revenue is recognized upon shipment. Distributors have no right of
return. Royalty revenues are recognized when the software or services has been
delivered, collection is reasonably assured and the fees are determinable.
F-7
SERVICE REVENUE -- Revenue from customer training, support and consulting
services is recognized as the services are performed. Support revenue is
recognized ratably over the term of the support contract. Until support revenue
is recognized it is included in "deferred revenue" on the accompanying
consolidated balance sheet. If support or professional services are included in
an arrangement that includes a license agreement, amounts related to support or
professional services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price when such elements are sold separately, or, when not sold
separately, the price established by management having the relevant authority.
INCOME TAXES -- Income taxes are provided using an asset and liability
approach which requires recognition of deferred tax liabilities and assets, net
of valuation allowances, for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities and net operating loss and tax credit carryforwards.
FOREIGN CURRENCY TRANSACTIONS -- The functional currencies of the Company's
foreign subsidiaries are the British Pound Sterling, Euro and the Hong Kong
Dollar. Accordingly, all monetary assets and liabilities are translated at the
current exchange rate at the end of the year, nonmonetary assets and liabilities
are translated at historical rates and net sales and expenses are translated at
average exchange rates in effect during the period. Translation gains and
losses, which are included in the balance sheets and in other comprehensive
income (loss) in the accompanying consolidated statements of changes in
stockholders' equity, have not been significant.
STOCK COMPENSATION -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
Accordingly, no accounting recognition is given to employee stock options
granted with an exercise price equal to fair market value of the underlying
stock on the grant date. Upon exercise, the net proceeds and any related tax
benefit are credited to stockholders' equity.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, as amended by SFAS
148 ACCOUNTING FOR STOCK-BASED COMPENSATION, TRANSITION AND DISCLOSURE, requires
the disclosure of pro forma net loss as if the Company had adopted the fair
value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions for options
outstanding under the 1997 Stock Plan:
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
---------- ---------- ----------
Risk Free Interest....................................................... 1.93% 4.00% 5.00%
Expected Life after vesting (years)...................................... 2.50 2.50 2.00
Expected Volatility...................................................... 145% 147% 183%
Expected Dividend........................................................ $0 $0 $0
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 had been amortized to expense over the vesting period of the
awards, pro forma net loss (net of amortization of deferred compensation expense
already recorded for the years ended December 31, 2003, 2002 and 2001, as
discussed above) would have been approximately as follows (in thousands, except
for per share data):
YEAR ENDED DECEMBER 31,
--------------------------------------
Net loss applicable to common shareholders: 2003 2002 2001
----------- ----------- -----------
As reported.................................................... $ (2,706) $ (5,440) $ (15,132)
Stock-based employee compensation expense included in reported
loss .......................................................... 31 88 245
Total stock-based employee compensation expense determined under
fair value based method for all awards......................... (241) (1,301) 3,785
----------- ----------- -----------
Pro forma net loss............................................. $ (2,916) $ (6,653) $ (11,102)
=========== =========== ===========
F-8
Basic and diluted net loss applicable to common shareholders per share:
As reported $ (1.11) $ (2.65) $ (7.60)
Pro forma $ (1.20) $ (3.24) $ (5.57)
The pro-forma reduction in net loss for 2001 from the amount reported was
due to the cancellation of unvested options that had higher original exercise
prices than the repriced options granted later in the year. This issue is
further discussed in the "stock option repricing" section of Note 6.
The Company accounts for stock-based awards to consultants using the
multiple option method as described by FASB Interpretation No. 28. Stock-based
compensation expense is recognized as earned. At each reporting date, the
Company re-values the stock-based compensation using the Black-Scholes
option-pricing model until the options vest. As a result, the stock-based
compensation expense will fluctuate as the fair market value of the Company's
common stock fluctuates.
NET LOSS PER COMMON SHARE -- Basic net loss per common share is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period (excluding shares subject to repurchase). Diluted net loss per
common share was the same as basic net loss per common share for all periods
presented. This result is due to the exclusion of all potentially dilutive
securities, which are anti-dilutive because of the Company's net losses.
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, and trade receivables. The risk associated with cash and
cash equivalents is mitigated by using only high-quality financial institutions.
The Company primarily sells its products to companies in the United States and
Europe. The Company does not require collateral or other security to support
accounts receivable. To reduce credit risk, management performs ongoing credit
evaluations of its customers' financial condition. The Company maintains
allowances for potential credit losses.
FINANCIAL INSTRUMENTS -- The Company's financial instruments include cash
and cash equivalents and long-term debt. At December 31, 2003 and 2002, the fair
value of these financial instruments approximated their financial statement
carrying amounts, because the financial instruments are either short-term or
reflect interest rates consistent with market rates.
SIGNIFICANT ESTIMATES -- The preparation of financial statements in
conformity with accounting principles as generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
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
F-9
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 December 31, 2003.
As a result, the Company believes the estimated fair value of these
indemnification provisions is minimal.
CERTAIN RISKS AND UNCERTAINTIES -- The Company operates in the software
industry, and accordingly, can be affected by a variety of factors. For example,
management of the Company believes that changes in any of the following areas
could have a significant negative effect on the Company in terms of its future
financial position, results of operations and cash flows: ability to obtain
additional financing; regulatory changes; fundamental changes in the technology
underlying software products; market acceptance of the Company's products under
development; development of sales channels; loss of significant customers;
adverse changes in international market conditions; litigation or other claims
against the Company; the hiring, training and retention of key employees;
successful and timely completion of product development efforts; and new product
introductions by competitors.
The Company has incurred net losses each year since 1996 including losses of
$2.7 million in 2003, $5.4 million in 2002 and $15.1 million in 2001. As of
December 31, 2003, the Company had an accumulated deficit of $64.1 million. The
Company believes its cash and cash equivalents of $5.7 million are sufficient to
meet its cash needs for working capital and capital expenditures through at
least December 31, 2004. If cash is insufficient to satisfy the Company's
liquidity requirements, we will seek to raise additional financing.
RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, BUSINESS COMBINATIONS
and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires
that all business combinations initiated after June 30, 2001 be accounted for
under the purchase method and addresses the initial recognition and measurement
of goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives will not be amortized, but will
rather be tested at least annually for impairment. The Company adopted SFAS No.
142 for the fiscal year beginning January 1, 2002. The impact of adopting this
standard was not material to the Company's financial statements as the Company
did not have any goodwill or intangible assets at that date.
A reconciliation of our previously reported net income per share to amounts
for the exclusion of goodwill amortization follows.
Year Ended December 31,
-----------------------
2003 2002 2001
----------- ---------- -----------
Net loss, as reported $ (2,706) $ (5,440) $ (15,132)
Less: Goodwill amortization -- -- 487
----------- ---------- -----------
Adjusted net loss $ (2,706) $ (5,440) $ (14,645)
=========== ========== ===========
Basic and diluted net loss
per share, as reported $ (1.11) $ (2.65) $ (7.60)
Less: Goodwill amortization -- -- 0.25
----------- ---------- -----------
Adjusted basic and diluted
net loss per share $ (1.11) $ (2.65) $ (7.35)
=========== ========== ===========
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally EITF Issue No. 94-3. 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. The adoption of SFAS No. 146 on January 1, 2003 did not have a
material effect on the Company's consolidated financial statements.
F-10
In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING FOR DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS. The adoption of this standard did not have
an impact on the Company's consolidated financial statements.
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. The adoption of EITF 00-21 did not have a
material impact on the Company's financial position or results of operations.
In 2003 the FASB issued FIN 46, Consolidation of Variable Interest Entities,
and several revisions (collectively FIN 46). These statements address
consolidation of variable interest entities and the Company does not expect the
adoption to have an effect on the Company's consolidated financial statements.
In December 2003 the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition. The adoption of SAB No. 104 did not have an effect on the Company's
consolidated financial statements.
2. ASSET WRITE-DOWNS AND EMPLOYEE TERMINATION COSTS
During 2003, no impairment charges were incurred. During 2002, the Company
recorded an impairment charge of $160,000 relating to the Company's evaluation
of certain purchased intangible assets. During 2001, the Company recorded an
impairment charge of $2.0 million relating to the Company's evaluation of
certain purchased intangible assets. The write-offs pertained to both software
purchased from third parties and goodwill from companies that had been acquired.
These assets were deemed to have become impaired due to various factors
including the availability of alternative software solutions and the product
transition from POWERTIER application server to the EDGEXTEND data services
product.
During 2003 and 2002, no restructuring costs were incurred. During 2001, the
Company adopted a plan to make organizational changes and reduce its work force.
The Company recorded and paid $1.7 million in charges for employee severance and
related operating expenses. This plan involved terminating 68 domestic
employees, of which 35 were in sales and marketing, 25 were in research and
development and 8 were in the general and administration functions. There were
no accrued and unpaid severance costs at December 31, 2001.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
---------------------
2003 2002
---------- ----------
(IN THOUSANDS)
Equipment................................................................ $ 1,792 $ 3,306
Software................................................................. 638 1,119
Leasehold improvements................................................... 66 177
---------- ----------
2,496 4,602
Accumulated depreciation and amortization................................ (2,401) (4,227)
---------- ----------
$ 95 $ 375
========== ==========
F-11
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
DECEMBER 31,
----------------------
2003 2002
---------- ----------
(IN THOUSANDS)
Equipment term loans........................................................ $ 59 $ 389
Capital lease obligations (see Note 5)...................................... 14 28
Other long-term obligations................................................. 279 517
---------- ----------
352 934
Less current portion........................................................ (334) (841)
---------- ----------
$ 18 $ 93
========== ==========
Borrowings under the following facilities with a bank are collateralized by
substantially all of the Company's assets.
On March 20, 2003, the Company renewed its credit facilities with the bank
for a revolving line of credit facility available through April 30, 2004 and as
of December 31, 2003, the Company had no borrowings outstanding under the credit
facility. Under this facility, any outstanding borrowings will bear interest at
the bank's prime rate (4.00 % at December 31, 2003) plus 0.5%. As of December
31, 2003 the Company was not in compliance with debt covenants associated with
the revolving line, and the bank waived this non-compliance for the fourth
quarter of 2003.
On February 18, 2004, the Company has renewed its credit facilities with a
bank. Under the renewed facilities, the Company has a revolving line of credit
facility of up to $1.5 million available through April 30, 2004. The bank's
renewed credit facilities require the Company, among other things, to maintain
certain working capital and profitability covenants. We expect to meet these
covenants. Borrowings under the facility are collateralized by substantially all
of the Company's assets.
As of November 2003, the Company had paid in full $240,000 outstanding under
its $655,000 equipment term loan with the bank which bore interest, at the
bank's base rate (4.00% at December 31, 2003) plus 0.5% per annum.
As of December 31, 2003, the Company had $59,000 outstanding under an
equipment term loan for the maximum principal amount of $250,000. Under this
facility borrowings outstanding on January 3, 2003 converted to an 18-month term
loan with principal payments of $8,229 per month beginning on February 1, 2003
with interest at the bank's base rate plus 1% per annum.
Other long-term obligations represent uncollateralized non-interest-bearing
amounts payable for the acquisition of various purchased intangibles that are
generally due within two years.
As of December 31, 2003, annual maturities under the equipment financing
facility, the existing equipment term loan, and the other long-term obligations
are as follows (includes capital lease obligations):
FISCAL YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------- --------------
2004...................................................................... $ 334
2005...................................................................... 16
2006...................................................................... 2
---------
Total............................................................. $ 352
=========
5. LEASE COMMITMENTS
Equipment with a net book value of $14,000 and $28,000 at December 31, 2003
and 2002, respectively, (net of accumulated amortization of $94,000 and $80,000)
has been leased under capital leases.
The Company leases its principal facility under a noncancelable operating
lease expiring on December 31, 2004. Rent expense for the Company's principal
facility and remote offices was approximately $822,000, $1.1 million and $1.1
million in 2003, 2002 and 2001, respectively.
F-12
Future minimum payments under the Company's leases at December 31, 2003 are:
CAPITAL OPERATING
LEASES LEASES
------ ------
(IN THOUSANDS)
2004............................................................... 8 664
2005............................................................... 8 62
2006............................................................... 3 --
------- ---------
Total.................................................... 19 $ 726
=========
Amount representing interest....................................... (5)
-------
Present value...................................................... 14
Current portion.................................................... (5)
-------
Long-term portion.................................................. $ 9
=======
The Company has sublet a portion of its office space to sub-tenants. The
future minimum lease payments due to the Company under these subleases is
$115,000 at December 31, 2003 of which $62,000 is for the year ending December
31, 2004 and $53,000 is for the year ending December 31, 2005.
6. STOCKHOLDERS' EQUITY
All share and per share amounts have been adjusted to reflect the 1-for-10
reverse stock split effected on June 12, 2003.
1997 STOCK PLAN
As of December 31, 2003, the Company has reserved 856,456 shares of common
stock for issuance, at the discretion of the Board of Directors, to officers,
directors, employees and consultants pursuant to its 1997 Stock Plan. This
reserved amount was increased automatically on January 1, 2004 under the
provisions of the Plan by 98,500 shares to 954,956 shares reserved. This
excludes a maximum of 3,864 additional shares that may be transferred from the
1994 Stock Purchase Plan. The 1997 Stock Plan also provides for an automatic
annual increase on the first day of 2003, 2004 and 2005 equal to the lesser of
98,500 shares, 4.94% of the outstanding common stock on the last day of the
immediately preceding fiscal year, or such lesser number as determined by the
Board of Directors.
Options granted under the 1997 Stock Plan generally vest over four years and
expire ten years from the date of grant.
STOCK OPTION REPRICING
On May 9, 2001, the Company offered to exchange all outstanding options
granted under the Company's 1997 Stock Plan that had an exercise price in excess
of $10.00 per share and were held by option holders who were employees of the
Company on the date of tender and through the grant date, for new options to
purchase shares of the Company's common stock. This offer expired on June 7,
2001 and resulted in the cancellation of 215,503 unexercised options. Subject to
the terms and conditions of the offer, the Company has granted new options under
the 1997 Stock Plan to purchase shares of common stock in exchange for such
tendered options no earlier than six months and one day after June 7, 2001. The
exercise price per share of the new options is $12.30 which is equal to the fair
market value of the underlying common stock on the date of grant, December 10,
2001, which was determined to be the last reported sale price of the common
stock on the Nasdaq National Market on the grant date.
1999 DIRECTORS' STOCK OPTION PLAN
The Company's 1999 Directors' Stock Option Plan (the "Directors' Plan")
became effective upon the closing of the Company's initial public offering in
June 1999. Under the Directors' Plan, a total of 50,000 shares of common stock
have been reserved for the grant of nonstatutory stock options to nonemployee
directors of the Company. Options granted under the Director's Plan shall be
immediately vested and expire in five years from the date of grant.
Additional information with respect to options under the 1997 Stock Plan and
the 1999 Directors' Stock Option Plan is as follows:
F-13
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
------------ -----------
Outstanding, January 1, 2001
(102,843 exercisable at a weighted average exercise price of $98.50)............ 388,876 $ 120.63
Granted (weighted average fair value of $13.60)................................. 469,684 14.75
Exercised....................................................................... (19,209) 5.60
Canceled........................................................................ (505,703) 94.26
------------ -----------
Outstanding, December 31, 2001
(104,145 exercisable at a weighted average exercise price of $35.05)............ 333,648 18.15
Granted (weighted average fair value of $6.21).................................. 100,900 7.01
Exercised....................................................................... (7,969) 6.30
Canceled........................................................................ (61,063) 26.97
------------ -----------
Outstanding, December 31, 2002
(157,762 exercisable at a weighted average exercise price of $20.94)............ 365,516 13.83
Granted (weighted average fair value of $3.09).................................. 250,100 3.31
Exercised....................................................................... (2,908) 2.48
Canceled........................................................................ (224,728) 11.78
------------ -----------
Outstanding, December 31, 2003 387,980 $ 8.32
============ ===========
Additional information regarding options outstanding as of December 31, 2003
is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ---------------------
WEIGHTED AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
------------------ ------------- ----------------- -------------- ----------- ---------
$ 2.30 to $ 2.50 78,657 9.11 $ 2.41 8,088 $ 2.40
$ 2.51 to $ 3.70 2,000 9.04 $ 3.70 2,000 $ 3.70
$ 3.71 to $ 4.11 108,750 9.96 $ 4.11 -- $ --
$ 4.12 to $ 10.03 65,431 8.34 $ 5.90 31,112 $ 6.14
$10.04 to $ 11.30 14,550 7.73 $ 10.88 9,450 $ 10.70
$11.31 to $169.38 118,592 7.76 $ 17.20 101,139 $ 17.91
-------- ---- -------- ------- --------
387,980 8.76 $ 8.32 151,789 $ 14.04
======== ========
1999 EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1999 Employee Stock Purchase Plan (the "ESPP"), eligible
employees may purchase common stock through payroll deductions, which may not
exceed 20% of any employee's compensation, nor more than 250 shares in any one
purchase period. A total of 143,175 shares of common stock has been reserved for
issuance under the ESPP as of December 31, 2003. The ESPP allows for an
automatic annual increase on the first day of 2003 and 2004 equal to the lesser
of 25,000 shares or 1% of outstanding common stock on the last day of the
immediately preceding fiscal year. During 2003, 8,740 shares were issued under
the ESPP at a price of $2.81 per share resulting in aggregate proceeds of
$25,000. During 2002, 11,498 shares were issued under the ESPP at prices ranging
from $3.70 to $6.00 per share resulting in aggregate proceeds of $45,000. During
2001, 9,036 shares were issued under the ESPP at prices ranging from $4.10 to
$32.90 per share resulting in aggregate proceeds of $178,000.
DEFERRED STOCK COMPENSATION
Some options granted and common stock issued in the past have been
considered to be compensatory, as the estimated fair value of the stock price
for accounting purposes was greater than the fair market value of the stock as
determined by the Board of Directors on the date of grant or issuance. Deferred
stock compensation has been amortized ratably over the vesting periods of these
securities (generally four years). Amortization of deferred stock compensation
for the years ended December 31, 2003, 2002 and 2001 was $31,000, $88,000, and
$245,000 respectively. As of December 31, 2003, all amounts of deferred
compensation had been expensed.
ISSUANCE OF STOCK WARRANTS
During 2003, the Company issued certain investors warrants for the purchase
of 90,000 shares of common stock at an exercise price of $4.48 in connection
with a common stock purchase agreement. Such warrants vested immediately. The
Company recorded fair value of the warrants of $298,000 using the Black-Scholes
pricing model using a risk free interest rate of 3.16%, contractual life of five
years and volatility of 143%. The fair value of the warrant was recorded as part
of the common stock offering costs.
F-14
During 2002, the Company issued certain affiliated investors warrants for
the purchase of 120,513 shares of common stock at an exercise price of $7.50 in
connection with a common stock purchase agreement. Such warrants vested
immediately. The Company recorded fair value of the warrants of $576,000 using
the Black-Scholes pricing model using a risk free interest rate of 4.8%,
contractual life of five years and volatility of 135%. The fair value of the
warrant was recorded as part of the common stock offering costs.
7. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands, except for per
share data):
YEAR ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
----------- ----------- -----------
Net loss (numerator), basic and diluted........................ $ (2,706) $ (5,440) $ (15,132)
Shares (denominator):
Weighted average common shares outstanding................... 2,432 2,053 1,994
Weighted average common shares outstanding subject
to repurchase............................................. -- -- (2)
----------- ----------- -----------
Shares used in computation, basic and diluted................ 2,432 2,053 1,992
=========== =========== ===========
Net loss per share, basic and diluted.......................... $ (1.11) $ (2.65) $ (7.60)
=========== =========== ===========
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been anti-dilutive. Such outstanding
securities consist of the following:
DECEMBER 31,
--------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Outstanding options........................................ 387,980 365,516 333,648
Warrants................................................... 223,513 133,513 8,000
-------------- -------------- --------------
Total............................................ 611,493 499,029 341,648
============== ============== ==============
Weighted average exercise price of options................. $ 8.32 $ 13.83 $ 18.15
============== ============== ==============
Weighted average exercise price of warrants................ $ 6.14 $ 7.25 $ 5.70
============== ============== ==============
8. INCOME TAXES
The Company's deferred income tax assets are comprised of the following at
December 31 (in thousands):
2003 2002
--------- ---------
Net deferred tax assets:
Net operating loss carryforwards..................................... $ 21,738 $ 20,330
Accruals deductible in different periods............................. 93 595
General business credits............................................. 2,652 3,593
Depreciation and amortization........................................ 2,587 3,308
--------- ---------
27,070 27,826
Valuation allowance.................................................. (27,070) (27,826)
--------- ---------
Total........................................................ $ -- $ --
========= =========
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards. Due to the uncertainty surrounding the
realization of the benefits of its favorable tax attributes in future tax
returns, as of December 31, 2003 and 2002, the Company has fully reserved its
net deferred tax assets of approximately $27.1 million and $27.8 million,
respectively.
The Company's effective rate differs from the expected benefit at the
federal statutory tax rate at December 31 as follows:
F-15
2003 2002 2001
--------- --------- ---------
Federal statutory tax rate..................................... (35.0)% (35.0)% (35.0)%
State taxes, net of federal benefit............................ (6.0) (6.0) (6.0)
Stock compensation expense..................................... -- -- --
Other.......................................................... 0.2 0.3 0.1
Valuation allowance............................................ 40.8 40.7 40.9
------ ------ ------
Effective tax rate............................................. --% --% --%
====== ====== ======
Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.
At December 31, 2003, the Company has net operating loss (NOL) carryforwards
of approximately $60.0 million and $13.1 million for federal and state income
tax purposes, respectively. The federal NOL carryforwards expire through 2023,
while the state NOL carryforwards expire through 2013. The net operating loss
carryforwards available for state tax purposes are substantially less than for
federal tax purposes, primarily because research and development expenditures
have been capitalized, only a specified percentage of losses can be utilized to
offset future state taxable income and state net operating loss carry forwards
generated in earlier years have expired.
At December 31, 2003, the Company also has research and development credit
carryforwards of approximately $1.8 million and $1.4 million available to offset
future federal and state income taxes, respectively. The federal credit
carryforwards expire through 2023 while state credit carryforwards have no
expiration.
The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
9. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company operates in one reportable segment: the development and
marketing of transactional application server software products.
F-16
The Company markets its products in the United States and internationally
through its sales personnel and independent sales representatives. The Company's
geographic data is as follows (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2003 2002 2001
------------------------ ------------------------- -------------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES(1) ASSETS REVENUES(1) ASSETS REVENUES(1) ASSETS
----------- ------ ----------- ------ ----------- ------
(IN THOUSANDS)
United States............ $ 5,545 $ 191 $ 9,764 $ 538 $ 11,989 $ 1,526
Europe................... 3,608 -- 4,550 14 5,505 54
Rest of the world........ 145 -- 272 1 1,877 2
-------- ------- -------- ------- -------- -------
$ 9,298 $ 191 $ 14,586 $ 553 $ 19,371 $ 1,582
======== ======= ======== ======= ======== =======
- ----------
(1) Revenues are broken out geographically by the ship-to location of the
customer.
SIGNIFICANT CUSTOMERS
During 2003, one customer accounted for 21% of the Company's total revenues.
During 2002, one customer accounted for 26% of the Company's total revenues and
another customer accounted for 13% of the Company's total revenues. During 2001,
one customer accounted for 15% of the Company's total revenues and another
customer accounted for 11% of the Company's total revenues.
At December 31, 2003, two customers accounted for 36% of accounts
receivable. At December 31, 2002, two customers accounted for 25% of accounts
receivable.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute a percentage of their eligible compensation. Company
contributions are discretionary; no such Company contributions have been made
since inception of this plan.
F-17
PERSISTENCE SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
PAGE
----
Independent Auditors' Report........................................... S-2
Schedule II-- Consolidated Schedule of Valuation and Qualifying Accounts
for the years ended December 31, 2003, 2002 and 2001................. S-3
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Persistence Software, Inc.:
We have audited the consolidated financial statements of Persistence
Software, Inc. and subsidiaries (the "Company") as of December 31, 2003 and
2002, and for each of the three years in the period ended December 31, 2003, and
have issued our report thereon dated March 29, 2004. Our audits also included
the consolidated financial statement schedule of the Company listed in the Index
at Item 15(a)(2). This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
March 29, 2004
S-1
SCHEDULE II
PERSISTENCE SOFTWARE, INC.
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
(IN THOUSANDS) BEGINNING CHARGED TO COST DEDUCTIONS/ BALANCE AT
OF YEAR AND EXPENSES WRITE-OFFS END OF YEAR
------- ------------ ---------- -----------
Year ended December 31, 2001 Allowance for
doubtful accounts............................... $ 1,228 $ 951 $ (2,027) $ 152
=========== =========== =========== ===========
Year ended December 31, 2002 Allowance for
doubtful accounts............................... $ 152 $ 353 $ (285) $ 220
=========== =========== =========== ===========
Year ended December 31, 2003 Allowance for
doubtful accounts .............................. $ 220 $ (45)(a) $ (101) $ 74
=========== =========== =========== ===========
(a) The reduction of expense is due to the collection of accounts receivable
reserved as doubtful accounts in prior periods.
S-2