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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-25857
================================================================================
PERSISTENCE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3138935
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(Address of principal executive offices, including zip code)
(650) 372-3600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of April 30, 2001, there were 20,005,255 shares of the registrant's Common
Stock outstanding.
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INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 AND
DECEMBER 31, 2000.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2001 AND 2000.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 2001 AND 2000.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
-------- ------------
(UNAUDITED) [1]
ASSETS
Current assets:
Cash and cash equivalents $ 10,643 $ 14,103
Short-term investments 4,203 5,387
Accounts receivable, net 4,768 7,121
Prepaid expenses and other current assets 732 831
-------- --------
Total current assets 20,346 27,442
Property and equipment, net 1,499 1,777
Purchased intangibles, net 3,592 4,310
Other assets 98 112
-------- --------
Total assets $ 25,535 $ 33,641
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,047 $ 1,657
Accrued compensation and related benefits 1,341 2,787
Other accrued liabilities 1,169 1,731
Deferred revenues 2,113 2,682
Current portion of long-term obligations 1,233 1,296
-------- --------
Total current liabilities 6,903 10,153
Long-term obligations 819 932
-------- --------
Total liabilities 7,722 11,085
-------- --------
Stockholders' equity:
Preferred stock -- --
Common stock 63,987 63,994
Deferred stock compensation (249) (592)
Notes receivable from stockholders (54) (94)
Accumulated deficit (45,907) (40,798)
Accumulated other comprehensive loss 36 46
-------- --------
Total stockholders' equity 17,813 22,556
-------- --------
Total liabilities and stockholders' equity $ 25,535 $ 33,641
======== ========
[1] The condensed consolidated balance sheet as of December 31, 2000 has been
extracted from the consolidated financial statements as of that date, and
does not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
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PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
-----------------------
MAR. 31, MAR. 31,
2001 2000
-------- --------
(UNAUDITED)
Revenues:
Licenses $ 2,131 $ 2,881
Service 2,735 1,329
-------- --------
Total revenues 4,866 4,210
-------- --------
Cost of revenues:
Licenses 5 50
Service 1,173 715
-------- --------
Total cost of revenues 1,178 765
-------- --------
Gross profit 3,688 3,445
Operating expenses:
Sales and marketing 4,349 5,998
Research and development, excluding
amortization of purchased intangibles 1,748 2,013
General and administrative 1,374 867
Amortization of purchased intangibles 718 496
Restructuring costs 785 --
-------- --------
Total operating expenses 8,974 9,374
-------- --------
Loss from operations: (5,286) (5,929)
Interest and other income (expense)
Interest income 204 380
Interest expense (20) (13)
Other, net (7) --
-------- --------
Total interest and other income (expense) 177 367
-------- --------
Net loss $ (5,109) $ (5,562)
======== ========
Basic and diluted net loss per share $ (0.26) $ (0.29)
======== ========
Shares used in calculating basic
and diluted net loss per share 19,791 18,968
======== ========
See notes to condensed consolidated financial statements.
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PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,109) $ (5,562)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 934 272
Amortization of deferred stock compensation 102 99
Change in allowance for doubtful accounts 18 324
Changes in operating assets and liabilities:
Accounts receivable 2,335 (320)
Prepaid expenses and other current assets 99 341
Accounts payable (610) (62)
Accrued compensation and related benefits (1,446) 956
Other accrued liabilities (562) 324
Deferred revenues (569) (29)
-------- --------
Net cash used in operating activities (4,808) (3,657)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments 1,184 1,533
Property and equipment additions 62 (372)
Purchased intangibles additions -- (173)
Deposits and other 14 (16)
-------- --------
Net cash provided (used in) by investing activities 1,260 972
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of repurchases 234 (6)
Repayment of notes receivable from stockholders 40
Repayment of capital lease obligations (11) (80)
Repayment of obligations incurred to acquire purchased intangibles (205)
Borrowing under loan agreement 106
Repayment under loan agreement (66)
-------- --------
Net cash used in financing activities 98 (86)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (10) --
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) (3,460) (2,771)
Beginning of period 14,103 22,300
-------- --------
End of period $ 10,643 $ 19,529
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for purchased intangibles -- $ 3,063
========
Release of compensatory stock arrangements $ 241 --
========
See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Persistence is a leading provider of transaction application servers and
dynamic Web content acceleration servers -- software that processes transactions
between users and back-end computer systems in electronic commerce systems.
Persistence's PowerTier application server software caches corporate application
data to speed business transactions, while the Company's Dynamai
application-aware software is designed to cache dynamic Web content to speed
Internet transactions.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this filing on
Form 10-Q as of March 31, 2001 and for the three month periods ended March 31,
2001 and 2000 have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Certain information and footnote disclosures normally
included in complete financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The December 31, 2000 balance sheet was extracted from
audited financial statements as of and for the year ended that date, but does
not include all disclosures required by generally accepted accounting principles
for complete financial statements. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the annual consolidated financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K as of and for year ended December 31,
2000 filed with the Securities and Exchange Commission.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's condensed
consolidated financial position as of March 31, 2001, its condensed consolidated
results of operations for the three month periods ended March 31, 2001 and 2000,
and its cash flows for the three month periods ended March 31, 2001 and 2000,
have been made. The results of operations and cash flows for any interim period
are not necessarily indicative of the operating results and cash flows for any
future interim or annual periods.
Certain reclassifications have been made to the 2000 financial statement
presentations to conform them to the current year periods' presentations.
3. NET LOSS PER SHARE
Basic net loss per common share excludes dilution and is computed by dividing
net loss by the weighted average number of common shares outstanding for the
period (excluding shares subject to repurchase). Diluted net loss per common
share was the same as basic net loss per common share for all periods presented,
since the effect of any potentially dilutive securities is excluded as they are
anti-dilutive because of the Company's net losses.
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The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands, except per share
amounts):
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
Net loss (numerator), basic and
diluted ....................................... $ (5,109) $ (5,562)
======== ========
Shares (denominator):
Weighted average common shares
outstanding ................................ 19,836 19,336
Weighted average common shares
outstanding subject to
repurchase ................................. (45) (368)
-------- --------
Shares used in computation,
basic and diluted .......................... 19,791 18,968
======== ========
Net loss per share, basic and
diluted ....................................... $ (0.26) $ (0.29)
======== ========
As of March 31, 2001 and 2000, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been anti-dilutive. Such outstanding
securities consist of the following (in thousands):
MARCH 31, MARCH 31,
2001 2000
--------- ---------
Shares of common stock subject to repurchase 38 337
Outstanding options 4,433 3,475
----- -----
Total 4,471 3,812
===== =====
4. COMPREHENSIVE INCOME
For all periods presented, the Company had no comprehensive income items
other than net loss and changes in the cumulative translation adjustment.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Relations Accounting Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement requires companies to record derivatives on the balance sheet as
assets or liabilities measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133 was effective for the Company's fiscal year beginning January 1, 2001.
The impact of adopting this standard was not material to our financial
statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our consolidated
financial statements as of December 31, 2000 and 1999 and for each of the years
ended December 31, 2000, 1999 and 1998, included in our Annual Report on Form
10-K as of and for the year ended December 31, 2000 filed with the Securities
and Exchange Commission. In addition, this Management's Discussion and Analysis
of Financial Condition and Results of Operations and other parts of this Form
10-Q contain forward-looking statements that involve risks and uncertainties.
Words such as "anticipates," "believes," "plans," "expects," "future,"
"intends," "targeting," and similar expressions identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or forecasted. Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled "Additional Factors That May Affect Future Results" and those appearing
elsewhere in this Form 10-Q and our Annual Report on Form 10-K as of and for the
year ended December 31, 2000 filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. We
assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting forward-looking
statements.
OVERVIEW
Persistence is a leading provider of transactional application servers and
dynamic Web content acceleration servers - software that processes transactions
between users and back-end computer systems in electronic commerce systems. We
were incorporated and began operations in 1991. Our first products incorporated
patented object-to-relational mapping and caching technologies, which have since
become the foundation for our PowerTier product family. From 1992 to 1996, we
introduced a variety of enhancements to these products, including a patented
data transformation technology for mapping objects to database tables, and
caching capabilities.
In 1996, we developed our PowerTier transactional application server, which
integrates all of the previously released Persistence products with new shared
transactional caching technologies, which enable multiple users to
simultaneously access the same cached data. We first shipped our PowerTier for
C++ transactional application server in 1997. Sales of PowerTier for C++
accounted for the majority of our revenues in 1997, 1998, and 1999, during which
years we added a professional services staff to enable our customers to
implement PowerTier more rapidly. We were one of the first companies to adopt
and implement the EJB specification. In 1998, we introduced PowerTier for EJB,
which customers have frequently purchased together with PowerTier for C++. Our
most recent version of PowerTier for EJB is currently in use by several major
customers and was commercially released in March 2000. In November 2000, we
introduced PowerTier for J2EE which incorporates our PowerTier for EJB products.
We currently plan to continue to focus product development efforts on
enhancements to both the PowerTier for C++ and the PowerTier for EJB/J2EE
products.
Our revenues, which consist of software license revenues and service
revenues, totaled $4.9 million in the three months ended March 31, 2001, $4.2
million in the three months ended March 31, 2000, $25.3 million in 2000, $14.4
million in 1999, and $10.2 million in 1998. License revenues consist of licenses
of our software products, which generally are priced based on the number of
users or servers. Service revenues consist of professional services consulting,
customer support and training. Because we only commenced selling application
servers in 1997, we have a limited operating history in the application server
market. We expect that, as a percentage of total revenues, sales of PowerTier
for J2EE transaction servers will increase and sales of PowerTier for C++ will
decrease in the future.
We market our software and services primarily through our direct sales
organizations in the United States, the United Kingdom, Germany, Hong Kong and
China. Revenues from licenses and services to customers outside the United
States were $2.0 million in the three months ended March 31, 2001, $1.4 million
in the three months ended March 31, 2000, $7.2 million in 2000, $4.1 million in
1999 and $2.9 million in 1998. Our future success will depend, in part, on our
successful development of international markets for our products.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. Sales of products to our top
five customers accounted for 52% in the three months ended March 31, 2001, 44%
in the three months ended March 31, 2000, 40% of total revenues in 2000, 35% of
total revenues in 1999, and 55% of total revenues in 1998. 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.
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To date, we have sold our products primarily through our direct sales force,
and we will need to continue to hire sales people, in particular those with
expertise in channel sales, in order to meet our sales goals. In addition, our
ability to achieve significant revenue growth will depend in large part on our
success in establishing and leveraging relationships with OEM partners and other
resellers.
We recognize revenues in accordance with the American Institute of Certified
Public Accountants Statement of Position 97-2, "Software Revenue Recognition,"
as amended by Statements of Position 98-4 and 98-9. Future implementation
guidance relating to these standards or any future standards may result in
unanticipated changes in our revenue recognition practices, and these changes
could affect our future revenues and earnings. In December 1999, the Securities
and Exchange Commission issued Staff Accounting Bulleting ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provided guidance on
the recognition, presentation and disclosure of revenue in the financial
statements. SAB No. 101 outlines basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue recognition
policies. The Company was required to implement SAB No. 101 in the fourth
quarter of the year ended December 31, 2000. The provisions of SAB No. 101 did
not have a material impact on the Company's consolidated financial position or
results of operations.
We recognize license revenues 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. 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. We recognize revenues from
customer training, support and consulting 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 when such elements are sold separately, or, when not sold
separately, the price established by management having the relevant authority to
make such decision. Arrangements that require significant modification or
customization of software are recognized under the percentage of completion
method.
Since inception, we have incurred substantial research and development costs
and have invested heavily in the expansion of our sales, marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. We had 152 employees as of December 31, 2000 and 135
as of March 31, 2001, representing a decrease of 11%. In April 2001, we released
28 employees as part of a worldwide restructuring and cost reduction objective.
Furthermore, we have incurred net losses in each quarter since 1996 and, as of
March 31, 2001, had an accumulated deficit of $45.9 million. We are currently
targeting that sales and marketing expenses, research and development expenses,
and general and administrative expenses, will remain at or below 2000 spending
levels. We expect to incur net losses for the year ending December 31, 2001.
We believe that period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as indicative of future performance.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in early stages of development,
particularly companies in new and rapidly evolving markets. We may not achieve
or maintain profitability in the future. Our success depends significantly upon
broad market acceptance of our PowerTier for J2EE application server. Because
Sun Microsystems controls the J2EE standard, we need to maintain a good working
relationship with them to develop future versions of PowerTier for J2EE, as well
as additional products using the J2EE standard. Our performance will also depend
on the level of capital spending in our target market of customers and on the
growth and widespread adoption of the market for business-to-business electronic
commerce over the Internet.
On May 9, 2001, the Company offered to exchange for new options all
outstanding options to purchase shares of common stock granted under the
Company's 1997 Stock Plan that have an exercise price in excess of $1.00 per
share and are held by option holders who are employees of the Company on the
date of tender and through the grant of the new options. This offer is scheduled
to expire on June 7, 2001. Subject to the terms and conditions of the offer, the
Company will grant new options under the 1997 Stock Plan to purchase up to a
maximum of 3,382,370 shares of common stock in exchange for such tendered
options no earlier than six months and one day after the tendered options are
accepted and canceled. The exercise price per share of the new options will
equal the fair market value of the underlying common stock on the date of grant,
which is currently determined as the last reported sale price of the common
stock on the Nasdaq National Market on the grant date.
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RESULTS OF OPERATIONS
THREE MONTHS (FIRST QUARTERS) ENDED MARCH 31, 2001 AND 2000
Revenues
Our revenues were $4.9 million for the three months ended March 31, 2001 and
$4.2 million for the three months ended March 31, 2000 representing an increase
of 16%. International revenues were $2.0 million for the three months ended
March 31, 2001 and $1.4 million for the three months ended March 31, 2000,
representing an increase of 43%. Salomon Smith Barney and Intershop accounted
for 20% and 16% of total revenues, respectively. For the three months ended
March 31, 2001, sales of products and services to our top five customers
accounted for 52% of total revenues. For the three months ended March 31, 2000,
sales of products and services to our top five customers accounted for 44% of
total revenues.
License Revenues. License revenues were $2.1 million for the three months
ended March 31, 2001 and $2.9 million for the three months ended March 31, 2000,
representing a decrease of 26%. License revenues represented 44% of total
revenues for the three months ended March 31, 2001 and 68% of total revenues for
the three months ended March 31, 2000. The decrease in software license revenues
was primarily due to our focus in the quarter on finalizing various large
contracts with significant service components.
Service Revenues. Our service revenues were $2.7 million for the three months
ended March 31, 2001 and $1.3 million for the three months ended March 31, 2000,
representing an increase of 106%. The increase in service revenues was primarily
due to the completion of various large contracts that included large components
of professional consulting services. Service revenues represented 56% of total
revenues for the three months ended March 31, 2001 and 32% of total revenues for
the three months ended March 31, 2000.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of packaging,
documentation and associated shipping costs. Our cost of license revenues was
$5,000 for the three months ended March 31, 2001 and $50,000 for the three
months ended March 31, 2000. As a percentage of license revenues, cost of
license revenues decreased to 0.2% for the three months ended March 31, 2001
from 2% for the three months ended March 31, 2000. This decrease is principally
related to our policy of immediately expensing license costs as opposed to
expensing the costs over future periods. Thus, there is no direct correlation
between license revenues and cost of revenues.
Cost of Service Revenues. Cost of service revenues consists of personnel and
other costs related to professional services, technical support and training.
Our cost of service revenues was $1.2 million for the three months ended March
31, 2001 and $715,000 for the three months ended March 31, 2000, representing an
increase of 64%. This increase was primarily due to the completion of various
large contracts that included large components of professional consulting
services. As a percentage of service revenues, cost of service revenues were 43%
for the three months ended March 31, 2001 and 54% for the three months ended
March 31, 2000. This decrease includes the effects of certain fixed service
costs being spread over a larger service revenue base.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses were $4.3 million for the three months ended March 31, 2001 and $6.0
million for the three months ended March 31, 2000, representing a decrease of
27%. This decrease was primarily due to a reduction in personnel and other
worldwide marketing and promotional expenses. Sales and marketing expenses
represented 89% of total revenues for the three months ended March 31, 2001 and
142% of total revenues for the three months ended March 31, 2000. We presently
are targeting that 2001 sales and marketing expense levels will be at or below
2000 expense levels.
Research and Development. Research and development expenses consist primarily
of salaries and benefits for software developers, product managers and quality
assurance personnel and payments to outside software developers. Our research
and development expenses were $1.7 million for the three months ended March 31,
2001 and $2.0 million for the three months ended March 31, 2000,
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representing a decrease of 13%. This decrease includes savings from the use of
non-U.S. technical contract staff. Research and development expenses represented
36% of total revenues for the three months ended March 31, 2001 and 48% of total
revenues for the three months ended March 31, 2000. We presently are targeting
that research and development expense levels will be at or below 2000 expense
levels.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and general management personnel. Our general and administrative
expenses were $1.4 million for the three months ended March 31, 2001 and
$867,000 for the three months ended March 31, 2000, representing an increase of
58%. This increase included additional spending in legal fees relating to the
protection of our patent rights. General and administrative expenses represented
28% of total revenues for the three months ended March 31, 2001 and 21% of total
revenues for the three months ended March 31, 2000. We presently are targeting
that general and administrative expense levels will be at or below 2000 expense
levels.
Amortization of Purchased Intangibles. Amortization of purchased intangibles
was $718,000 for the three months ended March 31, 2001 and $496,000 for the
three months ended March 31, 2000. The increase in amortization was due to the
increased level of purchased intangibles, primarily resulting from our
acquisition of additional purchased technology during 2000. In light of our
ongoing efforts related to restructuring our operations as discussed below, we
presently are reviewing the valuations and useful lives of our purchased
intangibles. This may result in a reduction in the net book value in 2001. We
had not completed our evaluation of potential impairment of such assets and
therefore did not record any valuation adjustments in the three months ended
March 31, 2001.
Restructuring Costs. Restructuring costs consist primarily of severance
payments to employees, the costs related to closing our operations in France and
associated expenses. Restructuring costs were $785,000 for the three months
ended March 31, 2001 and represented 16% of total revenue for the three months
ended March 31, 2001. We are presently considering additional actions to further
restructure our organization in 2001.
Interest and Other Income (Expense). Interest and other income (expense)
consists primarily of earnings on our cash, cash equivalents and short-term
investment balances, offset by interest expense related to obligations under
capital leases and other borrowings, and, in the first quarter of 2001, various
miscellaneous state and foreign taxes, and other expenses. Interest and other
income (expense) was $177,000 for the three months ended March 31, 2001 and
$367,000 for the three months ended March 31, 2000, representing a decrease of
52%. This decrease was primarily due to lower interest earned as a result of the
decrease in our cash balance. We expect that interest and other income (expense)
will decrease as we continue to use the net proceeds from our initial public
offering.
Stock-Based Compensation. Some options granted and common stock issued during
the years ended December 31, 2000, 1999, 1998 and 1997 have been considered to
be compensatory, as the estimated fair value for accounting purposes was greater
than the stock price as determined by the board of directors on the date of
grant or issuance. Total deferred stock compensation associated with equity
transactions as of March 31, 2001 was $249,000, net of amortization. Deferred
stock compensation is being amortized ratably over the vesting periods of these
securities. Amortization expense was $102,000 in the three months ended March
31, 2001 and $99,000 in the three months ended March 31, 2000.
Provision for Income Taxes. Since inception, we have incurred net operating
losses for federal and state tax purposes and have only recognized minimal tax
provisions within our international subsidiaries. We have placed a full
valuation allowance against our net deferred tax assets due to the uncertainty
surrounding the realization of these assets. We evaluate on a quarterly basis
the recoverability of the net deferred tax assets and the level of the valuation
allowance. If and when we determine that it is more likely than not that the
deferred tax assets are realizable, the valuation allowance will be reduced.
QUARTERLY RESULTS OF OPERATIONS
Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate in the future, as a result of a number of factors,
many of which are outside our control. These factors include:
- our ability to close relatively large sales on schedule;
- delays or deferrals of customer orders or deployments;
- delays in shipment of scheduled software releases;
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- demand for and market acceptance of our PowerTier products and other
products we introduce, including Dynamai;
- the possible loss of sales people;
- introduction of new products or services by us or our competitors;
- annual or quarterly budget cycles of our customers;
- the level of product and price competition in the application server
market;
- our lengthy sales cycle;
- our success in expanding our direct sales force and indirect distribution
channels;
- the mix of direct sales versus indirect distribution channel sales;
- the mix of products and services licensed or sold;
- the mix of domestic and international sales; and
- our success in penetrating international markets and general economic
conditions in these markets.
The typical sales cycle of our products is long and unpredictable, and is
affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter to gain price concessions. Because a substantial portion of our
costs are relatively fixed and based on anticipated revenues, a failure to book
an expected order in a given quarter would not be offset by a corresponding
reduction in costs and could adversely affect our operating results.
Our license revenues in the first quarter of 2001 were lower than those in
the fourth quarter of 2000 and our license revenues in the first quarter of 2000
were lower than those in the fourth quarter of 1999. In the future, we expect
this trend to continue, with the fourth quarter of each year accounting for the
greatest percentage of total revenues for the year and with an absolute decline
in revenues from the fourth quarter to the first quarter of the next year.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through our initial
public offering of common stock in June 1999, which totaled $34.1 million in
aggregate net proceeds, and private sales of convertible preferred stock, which
totaled $19.9 million in aggregate net proceeds. We have also financed our
business through a loan in the principal amount of $800,000, borrowings of
$640,000 under an equipment financing facility and capitalized leases. As of
March 31, 2001, we had $14.8 million of cash, cash equivalents and short-term
investments and $13.4 million of working capital.
Net cash used in operating activities was $4.8 million for the three months
ended March 31, 2001 and $3.7 million for the three months ended March 31, 2000.
For the first quarter of 2001, cash used in operating activities was
attributable primarily to net losses and decreases in accrued compensation,
other accrued liabilities, accounts payable and deferred revenues. Those
decreases were partially offset by a substantial decrease in accounts receivable
and by depreciation and amortization. For the first quarter of 2000, cash used
in operating activities was attributed primarily to net losses partially offset
by increases in accrued liabilities.
Net cash provided by investing activities was $1.3 million for the three
months ended March 31, 2001 and $972,000 for the three months ended March 31,
2000. For each of the periods, cash provided by investing activities was
attributable primarily to decreases in short-term investments as we utilized
cash.
Net cash provided by financing activities was $98,000 for the three months
ended March 31, 2001 and net cash used in financing activities was $86,000 for
the three months ended March 31, 2000.
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We have credit facilities with Comerica Bank. Under those credit facilities,
the Company has a $5.0 million revolving line of credit facility available
through October 31, 2001, an $800,000 equipment term loan, and a second
equipment financing facility for an amount up to $1.0 million under which
drawdowns were available through April 30, 2001. As of March 31, 2001 we had no
borrowings outstanding under the revolving line of credit facility. As of March
31, 2001, we had a promissory note in favor of Comerica related to our first
equipment term loan, under which $267,000 out of an original $800,000 was
outstanding. We are required to make principal payments of $22,222 per month
plus interest of 7.75% per annum on the unpaid principal balance, payable in 18
monthly installments. As of March 31, 2001 we had $640,000 outstanding under the
second equipment financing facility. Under this facility, borrowings of $655,000
outstanding on May 1, 2001 converted to a 30-month term loan having equal
monthly payments of principal and interest. Borrowings under the equipment
financing facility will bear interest at the bank's base rate plus 0.50%. The
bank's credit facilities require the Company, among other things, to maintain a
minimum tangible net worth of $10 million and a minimum quick ratio (current
assets not including inventory less current liabilities) of 2 to 1. As of March
31, 2001, we were in compliance with our debt covenants. Borrowings under the
facilities are collateralized by substantially all of the Company's assets
Currently we have no material commitments for capital expenditures nor do we
anticipate a material increase in capital expenditures and lease commitments. We
may increase our capital expenditures if we expand into additional international
markets.
We believe that our current cash, cash equivalents and short-term
investments, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures through at least the next 12 months. 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 additional financing as and when needed and on
acceptable terms, we may be required to reduce the scope of our planned product
development and marketing efforts, which could jeopardize our business.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the other
information contained in this annual report on Form 10-Q. The risks and
uncertainties described below are intended to be the ones that are specific to
our company or industry and that we deem to be material, but are not the only
ones that we face.
WE HAVE A LIMITED OPERATING HISTORY IN THE APPLICATION SERVER MARKET.
Because we only commenced selling application servers in 1997, we have a
limited operating history in the application server market. We thus face the
risks, expenses and difficulties frequently encountered by companies in early
stages of development, particularly companies in the rapidly changing software
industry. These risks include:
- the timing and magnitude of capital expenditures by our customers and
prospective customers;
- our substantial dependence for revenue from our PowerTier for C++ product,
which was first introduced in 1997 and has achieved only limited market
acceptance;
- our substantial dependence for revenue from our PowerTier for J2EE
product, which was first introduced in 1998 and has achieved only limited
market acceptance;
- our need to expand our distribution capability through various sales
channels, including a direct sales organization, original equipment
manufacturers, third party distributors and systems integrators;
- our unproven ability to anticipate and respond to technological and
competitive developments in the rapidly changing market for application
servers;
- our unproven ability to compete in a highly competitive market;
- uncertainty as to the growth rate in the electronic commerce market and,
in particular, the business-to-business electronic commerce market;
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- our need to achieve market acceptance for our new product introductions,
including Dynamai;
- our dependence on Enterprise JavaBeans, commonly known as J2EE, becoming a
widely accepted standard in the transactional application server market;
and
- our dependence upon key personnel.
BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NEVER BECOME
OR REMAIN PROFITABLE.
Our revenues may not continue to grow, and we may not be able to achieve or
maintain profitability in the future. We have incurred net losses each year
since 1996. In particular, we incurred losses of $5.1 million in the three
months ended March 31, 2001, $16.7 million in 2000, $11.3 million in 1999, $4.1
million in 1998 and $4.7 million in 1997. As of March 31, 2001, we had an
accumulated deficit of $45.9 million. While we are currently targeting
relatively flat sales and marketing, research and development, and general and
administrative expenses for 2001 as compared to 2000, we will still need to
increase our revenues to become profitable. Because our product market is new
and evolving, we cannot accurately predict either the future growth rate, if
any, or the ultimate size of the market for our products.
WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK AND NOT THROUGH CASH
GENERATED BY OUR OPERATIONS.
Since inception, we have generally had negative cash flow from operations. To
date, we have financed our business primarily through sales of common stock and
convertible preferred stock and not through cash generated by our operations. We
expect to continue to have negative cash flow from operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE.
Although we believe that our current cash, cash equivalents and short-term
investment balances will be sufficient to meet our anticipated operating cash
needs through at least 2001, we may need to raise additional funds prior to that
time. We face several risks in connection with this possible need to raise
additional capital:
- the issuance of additional securities could result in:
- debt securities with rights senior to the common stock;
- dilution to existing stockholders as a result of issuing additional
equity or convertible debt securities;
- debt securities with restrictive covenants that could restrict our
ability to run our business as desired; or
- securities issued on disadvantageous financial terms.
- the failure to procure needed funding could result in:
- a dramatic reduction in scope in our planned product development or
marketing efforts; or
- an inability to respond to competitive pressures or take advantage of
market opportunities.
If we are unable to obtain additional financing as and when needed and on
acceptable terms, we may be required to reduce the scope of our planned product
development and marketing efforts, which could jeopardize our business.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF
OUR COMMON STOCK.
Our operating results have fluctuated significantly in the past and may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside our control. In particular, the fourth quarter of each year
has in the past tended to account for the greatest percentage of total revenues
for the year, and we have often experienced an absolute decline in revenues from
the fourth quarter to the first quarter of the next year. If our future
quarterly operating results are below the expectations of securities analysts or
investors, the price of our common stock would likely decline. The factors that
may cause fluctuations of our operating results include the following:
- our ability to close relatively large sales on schedule;
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- delays or deferrals of customer orders or deployments;
- delays in shipment of scheduled software releases;
- demand for and market acceptance of our PowerTier products and other
products we introduce;
- the possible loss of sales people;
- introduction of new products or services by us or our competitors;
- annual or quarterly budget cycles of our customers;
- the level of product and price competition in the application server and
web content acceleration server markets;
- our lengthy sales cycle;
- our success in expanding our various sales channels, including a direct
sales force and indirect distribution channels;
- the mix of direct sales versus indirect distribution channel sales;
- the mix of products and services licensed or sold;
- the mix of domestic and international sales; and
- our success in penetrating international markets and general economic
conditions in these markets.
We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. Because a
substantial portion of our costs are relatively fixed and based on anticipated
revenues, a failure to book an expected order in a given quarter would not be
offset by a corresponding reduction in costs and could adversely affect our
operating results.
OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO
IT IS DIFFICULT TO FORECAST OUR REVENUES.
Any delay in sales of our products or services could cause our quarterly
revenues and operating results to fluctuate. The typical sales cycle of our
products is long and unpredictable and requires both a significant capital
investment decision by our customers and our education of potential 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 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
internet-related capital expenditures. Due to the relative importance of many of
our product sales, a lost or delayed sale could adversely affect our quarterly
operating results. Our sales cycle is affected by seasonal fluctuations as a
result of our customers' fiscal year budgeting cycles and slow summer purchasing
patterns in Europe.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. In the three months ended March
31, 2001, sales of products and services to our top five customers accounted for
52% of total revenues. In 2000, sales of products and services to Salomon Smith
Barney accounted for 16% of total revenues and sales to our top five customers
accounted for 40% of total revenues. In 1999, sales of products and services to
Cisco accounted for 13% of our total revenues, and sales of products and
services to our top five customers accounted for 35% of total revenues. In 1998,
sales of products and services to Cisco accounted for 14% of our total revenues,
sales of products and services to Instinet accounted for 17% of our total
revenues, and sales of products and services to our top five customers accounted
for 55% of total revenues. In addition, the identity of our top five customers
has changed from year to year. 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
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and make it harder for us to sell our products to other companies in that
industry. The loss of, or a reduction in sales to, one or more significant
customers would likely result in a decrease in our revenues.
WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD
AND THE EMERGING MARKET FOR DISTRIBUTED OBJECT COMPUTING, AND IF THESE
TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD SUFFER.
We are focusing significant marketing efforts on our PowerTier for J2EE
application server, which is based on three relatively new technologies, which
have not been widely adopted by a large number of companies. These three
technologies are a distributed object computing architecture, Sun Microsystems'
Java programming language and J2EE (formerly EJB). Distributed object computing
combines the use of software modules, or objects, communicating across a
computer network to software applications, such as our PowerTier application
server. J2EE is the Java programming standard for use in an application server.
In 1998, we launched our PowerTier for EJB product, which is a transactional
application server that uses Java and conforms to the EJB/J2EE standard. Sun
Microsystems released the J2EE standard in 1998, and thus far EJB/J2EE has had
limited market acceptance. Since our PowerTier for J2EE product depends upon the
specialized J2EE standard, we face a limited market compared to competitors who
may offer application servers based on more widely accepted standards, including
the Java programming language. We expect a substantial portion of our future
revenues will come from sales of products based on the J2EE standard. Thus, our
success depends significantly upon broad market acceptance of distributed object
computing in general, and Java application servers in particular. If J2EE does
not become a widespread programming standard for application servers, our
revenues and business could suffer.
IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS
AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS.
The market for our products and services is characterized by rapid
technological change, dynamic customer demands and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovation in software applications and hardware
configurations and the emergence or adoption of new industry standards,
including Internet technology standards. We may need to increase our research
and development investment 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 will need to
introduce new versions of PowerTier for J2EE designed to support these new
specifications to remain competitive. If we do not bring enhancements and new
versions of our products to market in a timely manner, our market share and
revenues could decrease and our reputation could suffer. If we fail to
anticipate or respond adequately to changes in technology and customer needs, or
if there are any significant delays in product development or introduction, our
revenues and business could suffer.
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 have a strong direct sales team to generate increased revenue. In the
last several years, we have experienced significant turnover in our sales team,
and in early 2001, we implemented a reduction in force and substantially
reorganized our sales team. In order to meet our future sales goals, we may need
to hire more salespeople for both our domestic and international sales efforts.
In the past, newly hired employees have required training and approximately six
to nine months experience to achieve full productivity. Like many companies in
the software industry, we are likely to continue to experience turnover in our
sales force, in particular as a result of our recent restructuring, and thus a
number of our sales people at any given time may be relatively new and may not
meet our sales goals. In addition, our recently hired employees may not become
productive, and we may not be able to hire enough qualified individuals in the
future.
BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES
CHANNEL THROUGH OEM PARTNERS AND OTHER RESELLERS, ANY FAILURE TO DEVELOP THIS
CHANNEL MAY RESULT IN LOWER REVENUES.
To date, we have sold our products primarily through our direct sales force,
but our ability to achieve significant revenue growth in the future will depend
in large part on our success in establishing and leveraging relationships with
OEM partners and other resellers. It may be difficult for us to establish these
relationships, and, even if we establish these relationships, we will then
depend on the sales efforts of these third parties. In addition, because these
relationships are nonexclusive, these third parties may choose to sell
application servers or other alternative solutions offered by our competitors,
and not our products. If we fail to successfully build our third-party
distribution channels or if our third party partners do not perform as expected,
our business could be harmed.
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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
enormous 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 systems
integrators 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 a systems integrator fails to complete a project utilizing our
product for a customer in a timely manner, our revenues or business reputation
could suffer.
BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE J2EE APPLICATION
SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR
THEIR OWN PRODUCTS.
Our success depends on achieving widespread market acceptance of our
PowerTier for J2EE application server. Because Sun Microsystems controls the
J2EE standard, we need to maintain a good working relationship with Sun
Microsystems to develop future versions of PowerTier for J2EE, as well as
additional products using J2EE, that will gain market acceptance. In March 1998,
we entered into a license agreement with Sun Microsystems, pursuant to which we
granted Sun Microsystems rights to manufacture and sell, by itself and not
jointly with others, products under a number of our patents, and Sun
Microsystems granted us rights to manufacture and sell, by ourselves and not
jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell some competing products that
would, in the absence of this license agreement, infringe our patents. Because
Sun Microsystems controls the J2EE standard, it could develop the J2EE standard
in a more proprietary way to favor a product offered by its subsidiary, iPlanet,
or a third party, which could make it much harder for us to compete in the J2EE
application server market.
MICROSOFT HAS ESTABLISHED A COMPETING APPLICATION SERVER STANDARD, WHICH COULD
DIMINISH THE MARKET POTENTIAL FOR OUR PRODUCTS IF IT GAINS WIDESPREAD
ACCEPTANCE.
Microsoft has established a competing standard for distributed computing,
COM, which includes an application server product. If this standard gains
widespread market acceptance over the J2EE or CORBA standards, on which our
products are based, our business would suffer. Because of Microsoft's resources
and commanding position with respect to other markets and technologies,
Microsoft's entry into the application server market may cause our potential
customers to delay purchasing decisions. We expect that Microsoft's presence in
the application server market will increase competitive pressure in this market.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE
HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The market for our products is intensely competitive, subject to rapid change
and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
- performance, including scalability, integrity and availability;
- ability to provide a complete software platform;
- flexibility;
- use of standards-based technology;
- ease of integration with customers' existing enterprise systems;
- ease and speed of implementation;
- quality of support and service;
- security;
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- company reputation; and
- price.
Our competitors for both PowerTier and Dynamai include both publicly and
privately-held enterprises, including BEA Systems (WebLogic), Secant
Technologies, IBM (WebSphere), Oracle (OAS) and i-Planet (Sun Microsystems).
Many customers may not be willing to purchase our PowerTier platform because
they have already invested heavily in databases and other enterprise software
components offered by these competing companies. Many of these competitors have
preexisting customer relationships, longer operating histories, greater
financial, technical, marketing and other resources, greater name recognition
and larger installed bases of customers than we do. In addition, some
competitors offer products that are less complex than our PowerTier products and
require less customization to implement with potential customers' existing
systems. Thus, potential customers engaged in simpler business-to-business
e-commerce transactions may prefer these "plug-and-play" products to our more
complex offerings. Moreover, there are other very large and established
companies, including Microsoft, who offer alternative solutions and are thus
indirect competitors. Further, dozens of companies have already supported, or
have announced their intention to support J2EE, and may compete against us in
the future. These competitors and potential competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than we can. In addition, in the PowerTier for C++
market, many potential customers build their own custom application servers, so
we effectively compete against our potential customers' internal information
technology departments.
In the Dynamai market, similar dynamic Web content acceleration technology is
available from a variety of sources, including but not limited to internal
development, application server vendors such as Oracle, electronic commerce
software vendors such as Intershop and ATG, content delivery networks such as
Akamai and epicRealm, and emerging software and hardware appliance vendors such
as Chutney and Cachier, who are directly targeting Dynamai's market.
IF THE MARKET FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE OVER THE INTERNET
DOES NOT DEVELOP AS WE CURRENTLY ENVISION, OUR BUSINESS MODEL COULD FAIL AND OUR
REVENUES COULD DECLINE.
Our performance and future success will depend on the growth and widespread
adoption of the market for business-to-business electronic commerce over the
Internet. If business-to-business electronic commerce does not develop in the
manner currently envisioned, 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
business-to-business 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
and taxation of Internet commerce.
OUR FAILURE TO MANAGE OUR RESOURCES COULD IMPAIR OUR BUSINESS.
Achieving our planned revenue growth and other financial objectives will
place significant demands on our management and other resources. Our ability to
manage our resources effectively will require us to continue to develop and
improve our operational, financial and other internal systems and controls, as
well as our business development capabilities, and to train, motivate and manage
our employees. If we are unable to manage our resources effectively, we may not
be able to retain key personnel and the quality of our services and products may
suffer.
OUR BUSINESS COULD SUFFER IF WE CANNOT ATTRACT AND RETAIN THE SERVICES OF KEY
EMPLOYEES.
Our future success depends on the ability of our management to operate
effectively, both individually and as a group. We are substantially dependent
upon the continued service of our existing executive personnel, especially
Christopher T. Keene, our Chief Executive Officer and Chairman of the Board. 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. There is significant competition for skilled employees,
especially for people who have experience in both the software and Internet
industries. We have experienced significant turnover among sales personnel in
recent years, which makes retention more challenging, in particular as a result
of our recent restructuring. 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
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harm our business. If we lose any key personnel, we may not be able to prevent
the unauthorized disclosure or use of our technical knowledge or other trade
secrets by those former employees.
OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR
SOFTWARE MAY BE DELAYED.
Complex software products often contain errors or defects, particularly when
first introduced or when new versions or enhancements are released. Our products
have in the past contained and may in the future contain errors and defects,
which may be serious or difficult to correct and which may cause delays in
subsequent product releases. Delays in shipment of scheduled software releases
or serious defects or errors could result in lost revenues or a delay in market
acceptance, which could have a material adverse effect on our revenues and
reputation.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS.
Because our customers use our products for important business applications,
errors, defects or other performance problems could result in financial or other
damages to our customers. They could pursue claims for damages, which, if
successful, could result in our having to make substantial payments. Although
our purchase agreements typically contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions. A
product liability claim brought against us, even if meritless, would likely be
time consuming and costly for us to litigate or settle.
A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM INTERNATIONAL SALES, WHICH
COULD DECLINE AS A RESULT OF LEGAL, BUSINESS AND ECONOMIC RISKS SPECIFIC TO
INTERNATIONAL OPERATIONS.
Our future success will depend, in part, on our successful development of
international markets for our products. Approximately 41% of our revenues came
from sales of products and services outside of the United States for the three
months ended March 31, 2001, and approximately 28% of our revenues came from
sales of products and services outside of the United States during each of 2000,
1999 and 1998. 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:
- difficulties of staffing and managing foreign operations;
- our dependence on the sales efforts of our third party distributors;
- longer payment cycles typically associated with international sales;
- tariffs and other trade barriers;
- failure to comply with a wide variety of complex foreign laws and changing
regulations;
- exposure to political instability and economic downturns;
- failure to localize our products for foreign markets;
- restrictions on the export of technologies;
- potentially adverse tax consequences;
- reduced protection of intellectual property rights in some countries; and
- currency fluctuations.
We sell products outside the United States 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
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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, which could harm our business. We rely on patent
protection, as well as a combination of copyright, trade secret and trademark
laws, and nondisclosure and other contractual restrictions 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. We are currently engaged in a
lawsuit to protect our intellectual property rights. Further litigation may be
necessary to enforce our intellectual property rights, which could result in
substantial costs and diversion of management attention and resources.
WE MAY BE SUED FOR PATENT INFRINGEMENT.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. As the number of
competitors in the application server and web content acceleration server
markets grow and the functionality of products in different market segments
overlaps, the possibility of an intellectual property claim against us
increases. For example, we may inadvertently infringe 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 is issued in the future. To address these
patent infringement or other intellectual property 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 against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement or other
intellectual property claims, with or without merit, which are brought against
us could be time consuming and expensive to litigate or settle and could divert
management attention from administering our core business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our current stockholders sell substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market, the market price of our common stock could fall. In
addition, these sales of common stock could impede our ability to raise funds at
an advantageous price through the sale of securities. As of March 31, 2001, we
had approximately 20 million shares of common stock outstanding. Virtually all
of our shares, other than shares held by affiliates, are freely tradeable. In
addition, shares held by affiliates are tradeable, subject to the volume and
other restrictions of Rule 144.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
Our common stock has only been available in the public market since June 24,
1999. An active public market for our common stock has not completely developed.
To date, the market price of our common stock has been highly volatile and may
rise or fall in the future as a result of many factors, such as:
- variations in our quarterly results;
- announcements of technological innovations by us or our competitors;
- introductions of new products by us or our competitors;
- acquisitions or strategic alliances by us or our competitors;
- hiring or departure of key personnel;
- the gain or loss of a significant customer or order;
- changes in estimates of our financial performance or changes in
recommendations by securities analysts;
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- market conditions and expectations regarding capital spending in the
software industry and in our customers' industries; and
- 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 has 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.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
AND COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER
APPROVAL.
As of April 30, 2001, executive officers and directors, and entities
affiliated with them, owned approximately 28% of our outstanding common stock.
Accordingly, these stockholders may, as a practical matter, continue to control
the election of a majority of the directors and the determination of all
corporate actions. This concentration of voting control could have the effect of
delaying or preventing a merger or other change in control, even if it would
benefit our other stockholders.
THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER.
Provisions in our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
- establishing a classified board in which only a portion of the total board
members will be elected at each annual meeting;
- authorizing the board to issue preferred stock;
- prohibiting cumulative voting in the election of directors;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE
OUR STOCKHOLDERS.
As part of our business strategy, we expect to review acquisition prospects
that we believe would be advantageous to the development of our business. While
we have no current agreements or negotiations underway with respect to any major
acquisitions of third-party technology, we may make acquisitions of businesses,
products or technologies in the future. If we make any acquisitions, we could
take any or all of the following actions, any of which could materially and
adversely affect our financial results and the price of our common stock:
- issue equity securities that would dilute existing stockholders'
percentage ownership;
- incur substantial debt;
- assume contingent liabilities; or
- take substantial charges in connection with the amortization of goodwill
and other intangible assets.
Acquisitions also entail numerous risks, including:
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- difficulties in assimilating acquired operations, products and personnel
with our pre-existing business;
- unanticipated costs;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have limited or no prior experience;
and
- potential loss of key employees from either our preexisting business or
the acquired organization.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business.
WE HAVE NOT DESIGNATED ANY SPECIFIC USE FOR THE NET PROCEEDS OF THE COMPANY'S
INITIAL PUBLIC OFFERING OF COMMON STOCK, AND THUS MAY USE THE REMAINING NET
PROCEEDS TO FUND OPERATING LOSSES, FOR ACQUISITIONS OR FOR OTHER CORPORATE
PURPOSES.
We have not designated any specific use for the net proceeds of our initial
public offering of common stock. As a result, our management and board of
directors has broad discretion in spending the remaining net proceeds of that
offering. We currently expect to use the remaining net proceeds primarily for
working capital and general corporate purposes, funding product development and
funding our sales and marketing organization. In addition, we may use a portion
of the remaining net proceeds for further development of our product lines
through acquisitions of products, technologies and businesses.
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, particularly because most of our cash
equivalents are invested in short-term debt instruments. If market interest
rates were to change immediately and uniformly by ten percent from levels at
March 31, 2001, the fair value of our cash equivalents would change by
approximately $75,000.
Foreign Currency Fluctuations. We operate in several international locations
using local currencies for the payment of employees and suppliers, however, we
did not have any significant net balances that are due or payable in foreign
currencies at March 31, 2001. A hypothetical ten percent change in foreign
currency rates would have changed the results of operations by approximately
$150,000 for the three months ended March 31, 2001. We do not hedge any of our
foreign currency exposures.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 6, 1999, the Company filed a patent infringement action in the
United States District Court for the Northern District of California against The
Object People Inc. and The Object People (U.S.) Inc. (collectively, "TOP"),
Persistence Software, Inc. v The Object People Inc., et al., Case No. C 99-5182
MMC (N.D. Cal.). On December 14, 1999, the Company filed a similar action
against Secant Technologies, Inc. ("Secant"), Persistence Software, Inc. v.
Secant Technologies, Inc., Case No. C 00-20210 SW (N.D. Cal.).
The action against Secant was settled in January 2001. The action against TOP
has reached the stage of provisional settlement and is expected to conclude by
the end of June 2001.
Except as described above, the Company is not currently subject to any
material legal proceedings, though it may from time to time become a party to
various legal proceedings that arise in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) Use of Proceeds
Our registration statement on Form S-1, SEC File No. 333-76867, for our
initial public offering of common stock became effective on June 24, 1999. We
registered and sold an aggregate of 3,450,000 shares of common stock under the
registration statement at a per share price of $11.00. Our underwriters were
BancBoston Robertson Stephens, U.S. Bancorp Piper Jaffray, and Soundview
Technology Group. Offering proceeds, net of aggregate underwriting commissions
and discounts of $2.7 million and other offering transaction expenses of $1.1
million, were $34.1 million. None of the underwriting commissions and discounts
or other offering transaction expenses were direct or indirect payments to our
directors, officers, or holders of 10% or more of our stock. From June 24, 1999
through March 31, 2001, we have used the net offering proceeds as follows:
Working capital expenditures...................... $14.2 million
Acquiring property and equipment.................. 2.2 million
Acquiring technologies............................ 2.9 million
22.3 million
Investing in cash and cash equivalents
and in short-term, investment grade,
interest-bearing securities..................... 14.8 million
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$34.1 million
=============
Each of the above amounts represents our best estimate of our use of the net
proceeds. None of the net offering proceeds were paid directly or indirectly to
our directors, officers, or holders of 10% or more of our stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
3.2 Amended and Restated Bylaws of Persistence Software,
as amended on March 2, 2001
(b) REPORTS ON FORM 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ CHRISTINE RUSSELL
-------------------------------
CHRISTINE RUSSELL
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: May 15, 2001
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3.2 Amended and Restated Bylaws of Persistence Software,
as amended on March 2, 2001