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 SEPTEMBER 30, 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 October 31, 2001, there were 20,002,863 shares of the
registrant's Common Stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001
AND DECEMBER 31, 2000
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 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
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
----------------------------
SEP. 30, DEC. 31,
2001 2000
----------- --------------
(UNAUDITED) (EXTRACTED)[1]
Assets:
Current assets:
Cash and cash equivalents $ 8,337 $ 14,103
Short-term investments -- 5,387
Accounts receivable, net 5,095 7,121
Prepaid expenses and other current assets 976 831
--------- ---------
Total current assets 14,408 27,442
Property and equipment, net 1,002 1,777
Purchased intangibles, net 901 4,310
Other assets 76 112
--------- ---------
Total assets $ 16,387 $ 33,641
========= =========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 1,003 $ 1,657
Accrued compensation and related benefits 1,103 2,787
Other accrued liabilities 1,433 1,731
Deferred revenues 2,412 2,682
Current portion of long-term obligations 914 1,296
--------- ---------
Total current liabilities 6,865 10,153
Long-term obligations 550 932
--------- ---------
Total liabilities 7,415 11,085
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 64,018 63,994
Deferred stock compensation (159) (592)
Notes receivable from stockholders (54) (94)
Accumulated deficit (54,860) (40,798)
Accumulated other comprehensive loss 27 46
--------- ---------
Total stockholders' equity 8,972 22,556
--------- ---------
Total liabilities and stockholders'
equity $ 16,387 $ 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.
3
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ---------------------
SEP. 30, SEP. 30, SEP. 30, SEP. 30,
2001 2000 2001 2000
----------- ----------- ---------- ---------
(UNAUDITED) (UNAUDITED)
Revenues:
Licenses $ 3,114 $ 5,356 $ 7,783 $ 12,639
Service 2,056 1,728 7,004 4,613
--------- --------- --------- ---------
Total revenues 5,170 7,084 14,787 17,252
--------- --------- --------- ---------
Cost of revenues:
Licenses 1 207 7 273
Service 975 857 3,337 2,474
--------- --------- --------- ---------
Total cost of revenues 976 1,064 3,344 2,747
--------- --------- --------- ---------
Gross profit 4,194 6,020 11,443 14,505
--------- --------- --------- ---------
Operating expenses:
Sales and marketing 3,739 5,234 11,906 16,487
Research and development,
excluding amortization
of purchased intangibles 1,229 2,042 4,560 6,268
General and administrative 1,464 1,649 4,232 4,008
Amortization and impairment
of purchased intangibles 245 799 3,422 2,066
Restructuring costs 200 -- 1,673 --
--------- --------- --------- ---------
Total operating expenses 6,877 9,724 25,793 28,829
Loss from operations (2,683) (3,704) (14,350) (14,324)
Interest income 55 393 374 1,091
Interest and other expense (41) (94) (86) (135)
--------- --------- --------- ---------
Net loss $ (2,669) $ (3,405) $(14,062) $(13,368)
========= ========= ========= =========
Basic and diluted net loss per
share $ (0.13) $ (0.18) $ (0.71) $ (0.70)
========= ========= ========= =========
Shares used in calculating basic
and diluted net loss per share 19,971 19,418 19,893 19,175
========= ========= ========= =========
See notes to condensed consolidated financial statements.
4
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
----------------------
SEP. 30, SEP. 30,
2001 2000
----------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,062) $ (13,368)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,895 2,567
Impairment of purchased intangibles 1,988 --
Amortization of deferred stock compensation 208 294
Loss on sale of fixed assets 154 --
Change in allowance for doubtful accounts (921) 694
Changes in operating assets and liabilities:
Accounts receivable 2,948 (2,045)
Prepaid expenses and other currents assets (144) (157)
Accounts payable (654) (392)
Accrued compensation and related benefits (1,684) 2,120
Other accrued liabilities (298) 767
Deferred revenues (270) 439
--------- ----------
Net cash used in operating activities (10,840) (9,081)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments 5,387 5,036
Purchase of property and equipment (83) (1,102)
Proceeds from sale of property and equipment 81 --
Acquisition of purchased intangibles -- (345)
Increase in other assets 36 (54)
--------- ----------
Net cash provided by investing activities 5,419 3,535
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of repurchases 249 2,324
Collection of notes receivable from stockholders 40 --
Repayment of capital lease obligations (35) (268)
Repayment of obligations incurred to acquire
purchased intangibles (415) --
Borrowing under loan agreement 122 --
Repayment under loan agreement (286) --
--------- ----------
Net cash provided by (used in) financing
activities (325) 2,056
--------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (19) --
--------- ----------
CASH AND CASH EQUIVALENTS:
Net decrease (5,766) (3,490)
Beginning of period 14,103 22,300
--------- ----------
End of period $ 8,337 $ 18,810
========= ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchased intangibles acquired under long-term
obligations $ (150) $ 885
========= ==========
Common stock issued for purchased intangibles $ -- $ 3,337
========= ==========
Release of compensatory stock arrangements $ 278 $ --
========= ==========
Compensatory stock arrangements $ (53) $ --
========= ==========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Persistence Software provides intelligent data management software that
enables enterprises to manage information more efficiently, and increase
scalability of applications in an affordable manner. Persistence's innovative
product family provides the best quality user experience by maintaining data
integrity and accuracy at multiple levels throughout the enterprise without
replicating databases. 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.Persistence Software's technology has
been licensed to Cisco, Intel and Sun, and customers include Reuters Instinet,
Sprint, Federal Express, JP Morgan, Sabre, and Celera.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this filing
on Form 10-Q as of September 30, 2001 and for the three and nine month periods
ended September 30, 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 September 30, 2001, its
condensed consolidated results of operations for the three and nine month
periods ended September 30, 2001 and 2000, and its cash flows for the nine month
periods ended September 30, 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. The effect of any potentially dilutive securities is excluded as they
are anti-dilutive in relation to the Company's net losses.
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 NINE MONTHS ENDED
SEP. 30, SEP. 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net loss (numerator), basic and diluted $ (2,669) $ (3,405) $(14,062) $(13,368)
========= ========= ========= =========
Shares (denominator):
Weighted average common shares outstanding 19,985 19,680 19,923 19,492
Weighted average common shares outstanding subject
to repurchase
(14) (262) (30) (317)
--------- --------- --------- ---------
Shares used in computation, basic and diluted 19,971 19,418 19,893 19,175
========= ========= ========= =========
Net loss per share, basic and diluted $ (0.13) $ (0.18) $ (0.71) $ (0.70)
========= ========= ========= =========
6
As of September 30, 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):
SEP. 30, SEP. 30,
2001 2000
-------- --------
Shares of common stock subject to repurchase 5 235
Outstanding options 1,436 3,975
Outstanding warrants 80 --
-------- --------
Total 1,521 4,210
-------- --------
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
account.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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 because the Company has
not entered into derivative instruments.
In June 2001, the FASB issued 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 will adopt SFAS No. 142
for the fiscal year beginning January 1, 2002. The impact of adopting this
standard is not expected to be material to our financial statements as the
Company does not currently carry any goodwill or intangible assets with
indefinite lives.
In October 2001, the Financial Accounting Standards Board approved for
issuance SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. The Company is required to adopt this standard no later than its fiscal
year beginning January 1, 2002. The impact of adopting this standard is not
expected to be material to the Company's financial statements.
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.
7
OVERVIEW
Persistence Software provides intelligent data management software that
enables enterprises to manage information more efficiently, and increase
scalability of applications in an affordable manner. Persistence's innovative
product family provides the best quality user experience by maintaining data
integrity and accuracy at multiple levels throughout the enterprise without
replicating databases. Persistence's unique distributed dynamic caching
technology enables greater access to accurate information, quicker response
times, improved productivity and increased scalability for geographically
disperse environments. 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 present, 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/J2EE is currently in use by several
major customers and was commercially released in March 2000. In 2000 we
introduced Dynamai, a new content-aware caching solution that provides
significant improvement in server throughput for processing dynamic content
requests. Dynamai also serves as a surge protector against web traffic spikes.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 $14.8 million in the nine months ended September 30, 2001, and
$17.3 million in the nine months ended September 30, 2000. Revenues for 2000
totaled $25.3 million, $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. We expect that,
as a percentage of total revenues, sales of PowerTier for EJB/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, Europe, and Hong Kong. Revenues from
licenses and services to customers outside the United States were $5.6 million
in the nine months ended September 30, 2001, and $6.2 million in the nine months
ended September 30, 2000. For the full years, $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 sales to a limited number of customers. Sales to our top five customers
accounted for 49% of revenues in the nine months ended September 30, 2001, and
41% of revenues in the nine months ended September 30, 2000. In addition, the
identity of our top five customers has changed from year to year. In the future,
it is likely that a relatively few large customers could continue to account for
a relatively large proportion of our revenues.
To date, we have sold our products and services 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 third parties.
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.
8
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 82
as of September 30, 2001, representing a decrease of 46%. In 2001, we have
released approximately 61 employees as part of worldwide restructuring and cost
reduction objectives. Furthermore, we have incurred net losses in each quarter
since 1996 and, as of September 30, 2001, had an accumulated deficit of $54.9
million. We are currently targeting that sales and marketing expenses, research
and development expenses, and general and administrative expenses, will remain
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 EJB/J2EE
application server and our more recently introduced caching products, Dynamai
and EdgeXtend. Because Sun Microsystems controls the EJB/J2EE standard, we need
to maintain a good working relationship with them to develop future versions of
PowerTier for EJB/J2EE, as well as additional products using the EJB/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 all outstanding options
granted under the Company's 1997 Stock Plan that had an exercise price in excess
of $1.00 per share and were held by option holders who were employees of the
Company on the date of tender and through the grant date, for new options to
purchase shares of the Company's common stock. This offer expired on June 7,
2001 and resulted in the cancellation of 2,155,032 unexercised options. Subject
to the terms and conditions of the offer, the Company will grant 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 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.
RESULTS OF OPERATIONS
POTENTIAL QUARTERLY VARIABILITY
Our quarterly operating results have fluctuated significantly
in the past, and may continue to fluctuate in the future, as a result
of a number of factors, many of which are outside our control. These
factors include:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o demand for and market acceptance of our PowerTier for C++ and
PowerTier for EJB/J2EE products and our newer Dynamai and
EdgeXtend products;
o introduction of new products or services by us or our
competitors;
o annual or quarterly budget cycles of our customers;
9
o the level of product and price competition in the application
server and caching market;
o our lengthy sales cycle;
o our success in maintaining our direct sales force and
expanding our indirect distribution channels;
o the mix of direct sales versus indirect distribution channel
sales;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in penetrating international markets and general
economic conditions in these markets.
The typical sales cycle of our products is long and unpredictable, and
is affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter to gain price concessions. Because a substantial portion of our
costs are relatively fixed and based on anticipated revenues, a failure to book
an expected order in a given quarter would not be offset by a corresponding
reduction in costs and could adversely affect our operating results.
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.
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
REVENUES
Our revenues were $5.2 million for the three months ended September 30,
2001 and $7.1 million for the three months ended September 30, 2000 representing
a decrease of 27%. International revenues were $1.2 million, for the three
months ended September 30, 2001 and $1.9 million for the three months ended
September 30, 2000. In the three months ended September 30, 2001, sales to
Cablevision accounted for 30% of total revenues and sales to Lucent accounted
for 13% of total revenues.
LICENSE REVENUES. License revenues consist of licenses of our software
products, which generally are priced based on the number of users or servers.
License revenues were $3.1 million for the three months ended September 30, 2001
and $5.4 million for the three months ended September 30, 2000, representing a
decrease of 43%. License revenues represented 60% of total revenues for the
three months ended September 30, 2001 and 76% of total revenues for the three
months ended September 30, 2000. The decrease in software license revenues was
due in part to a general slowdown in technology spending and our focus on
certain material consulting projects.
SERVICE REVENUES. Service revenues consist of professional services
consulting, technical support and training. Our service revenues were $2.1
million for the three months ended September 30, 2001 and $1.7 million for the
three months ended September 30, 2000, representing an increase of 24%. The
increase in service revenues was primarily due to our focus on certain material
consulting projects. Service revenues represented 40% of total revenues for the
three months ended September 30, 2001 and 24% of total revenues for the three
months ended September 30, 2000.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists of
third-party software packaged with our software, packaging, documentation and
associated shipping costs. Our cost of license revenues was $1,000 for the three
months ended September 30, 2001 and $207,000 for the three months ended
September 30, 2000. In the three months ended September 30, 2000, costs of
third-party software packaged with our software were $154,000. These costs are
expensed as incurred and not carried in inventory. Consequently, the costs can
be markedly different from one period to another and may bear no direct
relationship to license revenue.
10
COST OF SERVICE REVENUES. Cost of service revenues consists of
personnel and other costs related to professional services consulting, technical
support and training. Our cost of service revenues was $975,000 for the three
months ended September 30, 2001 and $857,000 for the three months ended
September 30, 2000, representing an increase of 14%. This increase was related
to professional services provided on consulting projects and higher costs
related to the provision of technical support to our customers. Cost of service
revenues as a percentage of service revenues may vary between periods due to our
use of third party professional services.
OPERATING EXPENSES
SALES AND MARKETING. 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 $3.7 million for the three months ended September 30, 2001 and
$5.2 million for the three months ended September 30, 2000, representing a
decrease of 29%. This decrease was primarily due to reductions in personnel
costs, trade shows attended and general promotional and market research
spending. Sales and marketing expenses represented 72% of total revenues for the
three months ended September 30, 2001 and 74% of total revenues for the three
months ended September 30, 2000. We are presently targeting sales and marketing
expense levels to be below comparable 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 $1.2 million for the three months ended
September 30, 2001 and $2.0 million for the three months ended September 30,
2000, representing a decrease of 40%. This decrease was primarily due to
reductions in personnel costs, recruiting and external consultants. We are
presently targeting research and development expense levels to be below
comparable 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, legal costs, bad debt
write-offs and the various costs associated with our status as a public company.
Our general and administrative expenses were $1.5 million for the three months
ended September 30, 2001 and $1.6 million for the three months ended September
30, 2000, representing a decrease of 6%. This decrease was principally related
to reductions in personnel costs. We are presently targeting general and
administrative expense levels to be below comparable 2000 expense levels.
AMORTIZATION AND IMPAIRMENT OF PURCHASED INTANGIBLES. Amortization and
impairment of purchased intangibles was $245,000 for the three months ended
September 30, 2001 and $799,000 for the three months ended September 30, 2000,
representing a decrease of 69%. Based on an evaluation of our purchased
intangibles at June 30, 2001, we recorded an impairment charge of $2.0 million
to write down the carrying value of these assets to their net realizable values,
which reflect the expected economic benefits to be derived from the use of these
assets.
NET INTEREST INCOME. Net interest income consists primarily of earnings
on our cash, cash equivalent and short-term investment balances, offset by
interest expense related to obligations under capital leases and other
borrowings. Net interest income was $14,000 for the three months ended September
30, 2001 and $300,000 for the three months ended September 30, 2000,
representing a decrease of 95%. This decrease was primarily due to a reduction
in our short-term investment balances and a general reduction in market interest
rates. We expect that net interest income will decrease in future periods but at
a lower rate than previously experienced.
STOCK-BASED COMPENSATION. Some options granted and common stock issued
during the three months ended September 30, 2001 and 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 September
30, 2001 was $159,000, net of amortization. Deferred stock compensation is being
amortized ratably over the vesting periods of these securities. Amortization
expense was $46,000 in the three months ended September 30, 2001 and $103,000 in
the three months ended September 30, 2000.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net
operating losses for federal and state tax purposes and have not recognized any
tax provision or benefit.
11
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.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
REVENUES
Our revenues were $14.8 million for the nine months ended September 30,
2001 and $17.3 million for the nine months ended September 30, 2000 representing
a decrease of 15%. International revenues were $5.6 million for the nine months
ended September 30, 2001 and $6.2 million for the nine months ended September
30, 2000. In the nine months ended September 30, 2001, sales to Salomon Smith
Barney accounted for 16% of revenues and sales to Cablevision accounted for 11%
of revenues. For the nine months ended September 30, 2000, sales to Cisco
accounted for 17% of our total revenues and sales to Lucent accounted for 10% of
revenues.
LICENSE REVENUES. License revenues consist of licenses of our software
products, which generally are priced based on the number of users or servers.
License revenues were $7.8 million for the nine months ended September 30, 2001
and $12.6 million for the nine months ended September 30, 2000, representing a
decrease of 38%. License revenues represented 53% of total revenues for the nine
months ended September 30, 2001 and 73% of total revenues for the nine months
ended September 30, 2000. The decrease in software license revenues was due in
part to the general slowdown in technology spending in 2001. In addition, our
focus on certain large projects with significant service components also
contributed to the relative reduction in license revenues.
SERVICE REVENUES. Service revenues consist of professional services
consulting, customer support and training. Our service revenues were $7.0
million for the nine months ended September 30, 2001 and $4.6 million for the
nine months ended September 30, 2000, representing an increase of 52%. The
increase in service revenues was primarily due to our focus on certain
significant professional services projects in 2001. Service revenues represented
47% of total revenues for the nine months ended September 30, 2001 and 27% of
total revenues for the nine months ended September 30, 2000.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists of
third-party software packaged with our software, packaging, documentation and
associated shipping costs. Our cost of license revenues was $7,000 for the nine
months ended September 30, 2001 and $273,000 for the nine months ended September
30, 2000. As a percentage of license revenues, cost of license revenues was less
than 1% for the nine months ended September 30, 2001 and 2% for the nine months
ended September 30, 2000. In the nine months ended September 30, 2001, costs of
third-party software packaged with our software were $154,000. These costs are
expensed as incurred and not carried in inventory. Consequently, the costs can
be markedly different from one period to another and may bear no direct
relationship to license revenue.
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 $3.3 million for the nine months
ended September 30, 2001 and $2.5 million for the nine months ended September
30, 2000, representing an increase of 32%. This increase was primarily due to
professional services provided on certain large projects. As a percentage of
service revenues, cost of service revenues were 48% for the nine months ended
September 30, 2001 and 54% for the nine months ended September 30, 2000. Cost of
service revenues as a percentage of service revenues may vary between periods
due to the level of consulting activity undertaken and our use of third party
professional services.
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 $11.9 million for the nine months ended September 30, 2001 and
$16.5 million for the nine months ended September 30, 2000, representing a
decrease of 28%. This decrease was primarily due to reductions in personnel,
trade shows attended and general promotional and market research spending. Sales
and marketing expenses represented 80% of total revenues for the nine months
ended September 30, 2001 and 96% of total revenues for the nine months ended
September 30, 2000. We are presently targeting sales and marketing expense
levels to be below comparable 2000 expense levels.
12
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 $4.6 million for the nine months ended
September 30, 2001 and $6.3 million for the nine months ended September 30,
2000, representing a decrease of 27%. This decrease was primarily due to
reductions in personnel, consultants and recruiting costs. Research and
development expenses represented 31% of total revenues for the nine months ended
September 30, 2001 and 36% of total revenues for the nine months ended September
30, 2000. We are presently targeting research and development expense levels to
be below comparable 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, legal costs, bad debt
write-offs and the various costs associated with our status as a public company.
Our general and administrative expenses were $4.2 million for the nine months
ended September 30, 2001 and $4.0 million for the nine months ended September
30, 2000, representing an increase of 5%. General and administrative expenses
represented 29% of total revenues for the nine months ended September 30, 2001
and 23% of total revenues for the nine months ended September 30, 2000. We are
presently targeting general and administrative expense levels to be below
comparable 2000 expense levels.
AMORTIZATION AND IMPAIRMENT OF PURCHASED INTANGIBLES. Amortization and
impairment of purchased intangibles was $3.4 million for the nine months ended
September 30, 2001 and $2.1 million for the nine months ended September 30,
2000. Based on an evaluation of our purchased intangibles at June 30, 2001, we
recorded an impairment charge of $2.0 million to write down the carrying value
of these assets to their net realizable values, which reflect the expected
economic benefits to be derived from the use of these assets.
NET INTEREST INCOME. Net interest income consists primarily of earnings
on our cash, cash equivalent and short-term investment balances, offset by
interest expense related to obligations under capital leases and other
borrowings. Net interest income was $288,000 for the nine months ended September
30, 2001 and $956,000 for the nine months ended September 30, 2000, representing
a decrease of 70%. This decrease was primarily due to the reduction in our
short-term investment balances and a general reduction in market interest rates.
We expect that net interest income will decrease in future periods but at a
lower rate than previously experienced.
STOCK-BASED COMPENSATION. Some options granted and common stock issued
during the nine months ended September 30, 2001 and 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 September
30, 2001 was $159,000, net of amortization. Deferred stock compensation is being
amortized ratably over the vesting periods of these securities. Amortization
expense was $208,000 in the nine months ended September 30, 2001 and $294,000 in
the nine months ended September 30, 2000.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net
operating losses for federal and state tax purposes and have not recognized any
tax provision or benefit.
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.
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 an equipment related loan in the maximum principal
amount of $800,000, a second equipment related loan in the amount of $655,000
and capitalized leases. As of September 30, 2001, we had $8.3 million of cash,
cash equivalents and short-term investments and $7.5 million of working capital.
Net cash used in operating activities was $10.8 million for the nine
months ended September 30, 2001 and $9.1 million for the nine months ended
September 30, 2000. For each of the nine months ended September 30, 2001 and
2000, cash used in operating activities was attributable primarily to net
operating losses. Those losses were partially offset by depreciation and
amortization, amortization of deferred stock compensation and the impairment of
purchased intangibles.
13
Net cash provided by investing activities was $5.4 million in the nine
months ended September 30, 2001 and $3.5 million in the nine months ended
September 30, 2000. For the nine months ended September 30, 2001, cash was
provided primarily from investing activities through the conversion of
short-term investments into cash and cash equivalents. For the nine months ended
September 30, 2000, cash was provided by investing activities through the
conversion of short-term investments into cash and cash equivalents, partially
offset by the purchase of property and equipment and by the acquisition of
intangible assets.
Net cash used in financing activities was $325,000 in the nine months
ended September 30, 2001 and net cash provided by financing activities was $2.1
million in the nine months ended September 30, 2000. Cash used in financing
activities during the nine months ended September 30, 2001 was primarily
attributable to the repayment of obligations incurred to acquire purchased
intangibles and repayments under loan agreements, offset by the sales of common
stock. Cash provided by financing activities during the nine months ended
September 30, 2000 was primarily attributable to the sales of common stock,
offset by the repayment of financing obligations.
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 January 31, 2002, an $800,000 equipment term loan, and a
second equipment financing facility of $655,000. As of September 30, 2001 we had
no borrowings outstanding under the revolving line of credit facility. As of
September 30, 2001, we had a promissory note in favor of Comerica related to our
first equipment term loan, under which $130,000 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 September 30, 2001 we had $568,000 outstanding under
the second equipment financing facility. We are required to make principal
payments of $21,843 per month, plus interest, at the bank's base rate plus 0.50%
per annum. The bank's credit facilities require the Company, among other things,
to maintain a minimum tangible net worth of $7 million and a minimum quick ratio
of 2 to 1. As of September 30, 2001, we were in compliance with, or had received
a waiver for, the obligations related to 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.
Based upon our current forecasts and estimates, we are targeting 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 December 31, 2002. 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. This could jeopardize our business operations and affect the
assumptions upon which our forecasts and plans have been based.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the
other information contained in this quarterly report on form 10-Q as well as in
our annual report on Form 10-K. The risks and uncertainties described below are
intended to be the ones that are specific to our company or industry and that we
deem to be material, but are not the only ones that we face.
WE HAVE A LIMITED OPERATING HISTORY IN THE 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:
o the timing and magnitude of capital expenditures by our
customers and prospective customers;
o our substantial dependence for revenue from our PowerTier for
C++ product, which was first introduced in 1997 and has
achieved only limited market acceptance;
14
o our substantial dependence for revenue from our PowerTier for
EJB/J2EE product, which was first introduced in 1998 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 and
systems integrators;
o our unproven ability to anticipate and respond to
technological and competitive developments in the rapidly
changing market for application servers;
o our unproven ability to compete in a highly competitive
market;
o uncertainty as to the growth rate in the software
infrastructure market;
o our need to achieve market acceptance for our new product
introductions, including Dynamai and EdgeXtend;
o our dependence on Enterprise JavaBeans, commonly known as
EJB/J2EE, becoming a widely accepted standard in the
transactional application server market; and
o our dependence upon key personnel.
BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NEVER BECOME
OR REMAIN PROFITABLE.
We may not achieve our targeted revenues and we may not be able to
achieve or maintain profitability in the future. We have incurred net losses
each year since 1996. In particular, we incurred losses of $14.1 million in the
nine months ended September 30, 2001, $16.7 million in 2000, $11.3 million in
1999, $4.1 million in 1998 and $4.7 million in 1997. As of September 30, 2001,
we had an accumulated deficit of $54.9 million. While we are currently targeting
decreases in sales and marketing, research and development, and general and
administrative expenses for 2001 as compared to 2000, we will still need to
achieve our revenue targets to become profitable on a pro forma basis. 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 MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE.
Based upon our current forecasts and estimates, 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 December 31, 2002.
However, 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:
o the issuance of additional securities could result in:
o debt securities with rights senior to the common
stock;
o dilution to existing stockholders as a result of
issuing additional equity or convertible debt
securities;
o debt securities with restrictive covenants that could
restrict our ability to run our business as desired;
or
o securities issued on disadvantageous financial terms.
o the failure to procure needed funding could result in:
o a dramatic reduction in scope in our planned product
development or marketing efforts; or
15
o 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. However, this trend
may not be repeated in the fourth quarter of 2001. If our future quarterly
operating results are below the expectations of securities analysts or
investors, the price of our common stock would likely decline. The factors that
may cause fluctuations of our operating results include the following:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o demand for and market acceptance of our PowerTier products and
other products we introduce;
o the possible loss of sales people;
o introduction of new products or services by us or our
competitors;
o annual or quarterly budget cycles of our customers;
o the level of product and price competition in the distributed
dynamic caching markets;
o our lengthy sales cycle;
o our success in expanding our various sales channels, including
a direct sales force and indirect distribution channels;
o the mix of direct sales versus indirect distribution channel
sales;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in penetrating international markets and general
economic conditions in these markets.
We typically receive a substantial portion of our orders in the last
two weeks of each fiscal quarter because our customers often delay purchases of
our products to the end of the quarter to gain price concessions. 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
16
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
technology-related capital expenditures. Due to the relative importance of many
of our product sales, a lost or delayed sale could adversely affect our
quarterly operating results. Our sales cycle is affected by seasonal
fluctuations as a result of our customers' fiscal year budgeting cycles and slow
summer purchasing patterns in Europe.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues
from sales to a limited number of customers. In the nine months ended September
30, 2001, sales to our top five customers accounted for 49% of total revenues
and sales to Salomon Smith Barney accounted for 16% of total revenues and sales
to Cablevision accounted for 11% of total revenues. In year ended December 31,
2000, sales to Salomon Smith Barney accounted for 16% of total revenues and
sales to our top five customers accounted for 40% of total revenues. In year
ended December 31, 1999, sales to Cisco accounted for 13% of our total revenues,
and sales to our top five customers accounted for 35% of total revenues. In year
ended December 31, 1998, sales to Cisco accounted for 14% of our total revenues,
sales to Instinet accounted for 17% of our total revenues, and sales 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 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 sales to industry
leaders, any loss of a customer could harm our reputation within the industry
and make it harder for us to sell 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 conformed to the EJB standard. Sun
Microsystems released the EJB standard in 1998, and thus far EJB 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.
17
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO BUILD 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, and in the three months ended September 30, 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 THIRD PARTIES, 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 third parties. It may be difficult for us to establish
these relationships, and, even if we establish these relationships, we will then
depend on the sales efforts of these third parties. In addition, because these
relationships are nonexclusive, these third parties may choose to sell
application servers or other alternative solutions offered by our competitors,
and not our products. If we fail to successfully build our third-party
distribution channels or if our third party partners do not perform as expected,
our business could be harmed.
BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM
DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES.
Because our products are often incorporated into multi-million dollar
enterprise projects, we depend on the successful and timely completion of these
large projects to fully deploy our products and achieve our revenue goals. These
enterprise projects often take many years to complete and can be delayed by a
variety of factors, including general or industry-specific economic downturns,
our customers' budget constraints, other customer-specific delays, problems with
other system components or delays caused by the OEM 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 partner fails to complete a project utilizing our product for a customer in
a timely manner, our revenues or business reputation could suffer.
BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE EJB/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,
i-Planet, 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.
18
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:
o performance, including scalability, integrity and
availability;
o ability to provide a complete software platform;
o flexibility;
o use of standards-based technology;
o ease of integration with customers' existing enterprise
systems;
o ease and speed of implementation;
o quality of support and service;
o security;
o company reputation; and
o price.
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 INFRASTRUCTURE SOFTWARE FOR NETWORKS AND WEB-BASED PRODUCTS
AND SERVICES 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 infrastructure software for networks and
web-based products and services. If this market 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
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
and taxation of Internet commerce.
19
OUR FAILURE TO MANAGE OUR RESOURCES COULD IMPAIR OUR BUSINESS.
Achieving our planned revenue targets and other financial objectives
will place significant demands on our management and other resources. 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. 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
restructurings. If we are not successful in attracting and retaining these
skilled employees, our sales and product development efforts would suffer. In
addition, if one or more of our key employees resigns to join a competitor or to
form a competing company, the loss of that employee and any resulting loss of
existing or potential customers to a competitor could harm our business. If we
lose any key personnel, we may not be able to prevent the unauthorized
disclosure or use of our technical knowledge or other trade secrets by those
former employees.
OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR
SOFTWARE MAY BE DELAYED.
Complex software products often contain errors or defects, particularly
when first introduced or when new versions or enhancements are released. Our
products have in the past contained and may in the future contain errors and
defects, which may be serious or difficult to correct and which may cause delays
in subsequent product releases. Delays in shipment of scheduled software
releases or serious defects or errors could result in lost revenues or a delay
in market acceptance, which could have a material adverse effect on our revenues
and reputation.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS.
Because our customers use our products for important business
applications, errors, defects or other performance problems could result in
financial or other damages to our customers. They could pursue claims for
damages, which, if successful, could result in our having to make substantial
payments. Although our purchase agreements typically contain provisions designed
to limit our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could negate these limitation of liability
provisions. A product liability claim brought against us, even if meritless,
would likely be time consuming and costly for us to litigate or settle.
A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM INTERNATIONAL SALES, WHICH
COULD DECLINE AS A RESULT OF LEGAL, BUSINESS AND ECONOMIC RISKS SPECIFIC TO
INTERNATIONAL OPERATIONS.
Our future success will depend, in part, on our successful development
of international markets for our products. Approximately 38% of our revenues
came from sales of products and services outside of the United States for the
nine months ended September 30, 2001, and approximately 28% of our revenues came
from sales of products and services outside of the United States for the fiscal
year 2000. 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:
20
o difficulties of staffing, funding and managing foreign
operations;
o future dependence on the sales efforts of 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 and economic downturns;
o failure to localize our products for foreign markets;
o restrictions on the export of technologies;
o potentially adverse tax consequences;
o reduced protection of intellectual property rights in some
countries; and
o 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 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 recently settled 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 distributed dynamic caching
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.
21
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 September 30, 2001,
we had approximately 20.0 million shares of common stock outstanding. Virtually
all of our shares, other than shares held by affiliates, are freely tradable. In
addition, shares held by affiliates are tradable, subject to the volume and
other restrictions of Rule 144.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
Our 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 stock 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 buying or selling shares of our common stock at a desirable price, or
at all. Our common stock is currently trading below the $1.00 per share
requirement for continued listing on the Nasdaq National Market.
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 technological innovations by us or our
competitors;
o introductions of new products by us or our competitors;
o acquisitions or strategic alliances by us or our competitors;
o hiring or departure of key personnel;
o the gain or loss of a significant customer or order;
o changes in estimates of our financial performance or changes
in recommendations by securities analysts;
o market conditions and expectations regarding capital spending
in the software industry and in our customers' industries; and
o adoption of new accounting standards affecting the software
industry.
The market prices of the common stock of many companies in the software
and Internet industries have experienced extreme price and volume fluctuations,
which 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 September 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.
22
THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER.
Provisions in our certificate of incorporation, bylaws and Delaware law
may discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
o establishing a classified board in which only a portion of the
total board members will be elected at each annual meeting;
o authorizing the board to issue preferred stock;
o prohibiting cumulative voting in the election of directors;
o limiting the persons who may call special meetings of
stockholders;
o prohibiting stockholder action by written consent; and
o establishing advance notice requirements for nominations for
election of the board of directors or for proposing matters
that can be acted on by stockholders at stockholder meetings.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE
OUR STOCKHOLDERS.
As part of our business strategy, we expect to review acquisition
prospects that we believe would be advantageous to the development of our
business. While we have no current agreements or negotiations underway with
respect to any major acquisitions of third-party technology, we may make
acquisitions of businesses, products or technologies in the future. If we make
any acquisitions, we could take any or all of the following actions, any of
which could materially and adversely affect our financial results and the price
of our common stock:
o issue equity securities that would dilute existing
stockholders' percentage ownership;
o incur substantial debt;
o assume contingent liabilities; or
o take substantial charges in connection with the impairment of
goodwill and amortization of other intangible assets.
Acquisitions also entail numerous risks, including:
o difficulties in assimilating acquired operations, products and
personnel with our pre-existing business;
o unanticipated costs;
o diversion of management's attention from other business
concerns;
o adverse effects on existing business relationships with
suppliers and customers;
o risks of entering markets in which we have limited or no prior
experience; and
o potential loss of key employees from either our preexisting
business or the acquired organization.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business.
23
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 have 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 September 30, 2001, the interest earned from our short-term
investments for the nine months ended September 30, 2001 would change by
approximately $34,000.
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 September 30, 2001. A hypothetical ten percent change in
foreign currency rates would have changed the results of operations by
approximately $400,000 for the nine months ended September 30, 2001. We do not
hedge any of our foreign currency exposures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings,
though it may from time to time become a party to various legal proceedings that
arise in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Sales of Unregistered Securities
None
(b) 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 September 30, 2001, we have used the net offering proceeds as follows:
Working capital expenditures $20.6 million
Acquiring property and equipment 2.3 million
Acquiring technologies 2.9 million
-------------
25.8 million
Investing in cash and cash equivalents
and in short-term, investment grade,
interest-bearing securities 8.3 million
-------------
$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.
24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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:
None
(b) REPORTS ON FORM 8-K:
None.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ CHRISTINE RUSSELL
----------------------------------
CHRISTINE RUSSELL
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
Date: November 13, 2001
26
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
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