UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-25857
================================================================================
PERSISTENCE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3138935
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(Address of principal executive offices, including zip code)
(650) 372-3600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of April 30, 2002, there were 20,153,087 shares of the registrant's
Common Stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2002
AND DECEMBER 31, 2001.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2002 AND 2001.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 2002 AND 2001.
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)
MARCH 31, DECEMBER 31,
2002 2001
--------- ---------
(UNAUDITED) [1]
ASSETS
Current assets:
Cash and cash equivalents $ 7,189 $ 7,411
Accounts receivable, net 3,879 4,106
Prepaid expenses and other current assets 544 656
--------- ---------
Total current assets 11,612 12,173
Property and equipment, net 641 796
Purchased intangibles, net 568 722
Other assets 73 64
--------- ---------
Total assets $ 12,894 $ 13,755
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 943 $ 1,070
Accrued compensation and related benefits 1,004 892
Other accrued liabilities 477 457
Deferred revenues 4,627 2,124
Current portion of long-term obligations 788 847
--------- ---------
Total current liabilities 7,839 5,390
Long-term obligations 320 421
--------- ---------
Total liabilities 8,159 5,811
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 64,112 64,036
Deferred stock compensation (85) (119)
Notes receivable from stockholders (54) (54)
Accumulated deficit (59,239) (55,930)
Accumulated other comprehensive loss 1 11
--------- ---------
Total stockholders' equity 4,735 7,944
--------- ---------
Total liabilities and stockholders' equity $ 12,894 $ 13,755
========= =========
[1] The condensed consolidated balance sheet as of December 31, 2001 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
-----------------------
MAR. 31, MAR. 31,
2002 2001
--------- ---------
(UNAUDITED)
Revenues:
Licenses $ 833 $ 2,131
Service 1,328 2,735
--------- ---------
Total revenues 2,161 4,866
--------- ---------
Cost of revenues:
Licenses 27 5
Service 768 1,173
--------- ---------
Total cost of revenues 795 1,178
--------- ---------
Gross profit 1,366 3,688
Operating expenses:
Sales and marketing 2,434 4,349
Research and development, excluding
amortization of purchased intangibles 1,118 1,748
General and administrative 927 1,374
Amortization of purchased intangibles 212 718
Restructuring costs -- 785
--------- ---------
Total operating expenses 4,691 8,974
--------- ---------
Loss from operations (3,325) (5,286)
Interest and other income (expense):
Interest income 35 204
Interest expense (10) (20)
Other, net (9) (7)
--------- ---------
Total interest and other income (expense) 16 177
--------- ---------
Net loss $ (3,309) $ (5,109)
========= =========
Basic and diluted net loss per share $ (0.16) $ (0.26)
========= =========
Shares used in calculating basic
and diluted net loss per share 20,089 19,791
========= =========
See notes to condensed consolidated financial statements.
4
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
---------------------
2002 2001
--------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,309) $ (5,109)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 381 934
Amortization of deferred stock compensation 34 102
Change in allowance for doubtful accounts 267 18
Changes in operating assets and liabilities:
Accounts receivable (41) 2,335
Prepaid expenses and other current assets 112 99
Accounts payable (127) (610)
Accrued compensation and related benefits 112 (1,446)
Other accrued liabilities 20 (562)
Deferred revenues 2,503 (569)
--------- ---------
Net cash used in operating activities (48) (4,808)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments -- 1,184
Property and equipment additions (26) 62
Purchased intangibles additions (45) --
Deposits and other (9) 14
--------- ---------
Net cash provided by/(used in) investing activities (80) 1,260
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of repurchases 76 234
Repayment of notes receivable from stockholders -- 40
Borrowing under capital lease obligations 34 --
Repayment of capital lease obligations (6) (11)
Repayment of obligations incurred to acquire purchased intangibles (55) (205)
Borrowing under loan agreement -- 106
Repayment under loan agreement (133) (66)
--------- ---------
Net cash provided by/(used in) financing activities (84) 98
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (10) (10)
--------- ---------
CASH AND CASH EQUIVALENTS:
Net decrease (222) (3,460)
Beginning of period 7,411 14,103
--------- ---------
End of period $ 7,189 $ 10,643
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Release of compensatory stock arrangements $ -- $ 241
========= =========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Persistence Software solves data access problems for distributed and
real-time systems. Persistence solutions help deliver better business visibility
for applications that require current information about customers, products and
suppliers. Persistence is a leading provider of transaction application servers,
data management products, and dynamic Web content acceleration servers --
software that processes transactions between users and back-end computer systems
in electronic commerce systems.
Persistence provides a suite of data management products that sit between
existing databases - such as Oracle and DB/2 - and application servers - such as
WebLogic and WebSphere. Developers can configure these products to structure and
position business information with optimal efficiency, improving application
server performance and simplifying application distribution while reducing
database costs.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this filing on
Form 10-Q as of March 31, 2002 and for the three month periods ended March 31,
2002 and 2001 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, 2001 balance sheet was extracted from
audited financial statements as of that date, but does not include all
disclosures required by generally accepted accounting principles for complete
financial statements. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the annual
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K as of and for year ended December 31, 2001
filed with the Securities and Exchange Commission.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's condensed
consolidated financial position as of March 31, 2002, its condensed consolidated
results of operations for the three month periods ended March 31, 2002 and 2001,
and its condensed consolidated cash flows for the three month periods ended
March 31, 2002 and 2001, have been made. The results of operations and cash
flows for any interim period are not necessarily indicative of the operating
results and cash flows for any future interim or annual periods.
3. NET LOSS PER SHARE
Basic net loss per common share excludes dilution and is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period (excluding shares subject to repurchase). Diluted net loss per
common share was the same as basic net loss per common share for all periods
presented, since the effect of any potentially dilutive securities is excluded
as they are anti-dilutive because of the Company's net losses.
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands, except per share
amounts):
THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2001
---------- ----------
Net loss (numerator), basic and
diluted.............................. $ (3,309) $ (5,109)
========== ==========
Shares (denominator):
Weighted average common shares
outstanding....................... 20,089 19,836
Weighted average common shares
outstanding subject to
repurchase........................ -- (45)
---------- ----------
Shares used in computation,
basic and diluted................. 20,089 19,791
========== ==========
Net loss per share, basic and
diluted.............................. $ (0.16) $ (0.26)
========== ==========
6
As of March 31, 2002 and 2001, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been anti-dilutive. Such outstanding
securities consist of the following (in thousands):
MARCH 31, MARCH 31,
2002 2001
--------- ---------
Shares of common stock subject to repurchase -- 38
Outstanding options 3,353 4,433
Warrants 80 --
--------- ---------
Total 3,433 4,471
========= =========
4. COMPREHENSIVE INCOME
For all periods presented, the Company had no comprehensive income items
other than net loss and changes in the cumulative translation adjustment.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
No. 142 provides that intangible assets with finite useful lives be amortized
and that goodwill and intangible assets with indefinite lives will not be
amortized, but will rather be tested at least annually for impairment. The
Company adopted SFAS No. 142 for the fiscal year beginning January 1, 2002. The
impact of adopting this standard 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 FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale whether
previously held and used or newly acquired, and broadened the presentation of
discounted operations to include more disposal transactions. SFAS No. 144 will
be effective for fiscal years beginning after December 15, 2001. The Company
adopted the provisions of SFAS No. 144 as of January 1, 2002 but does not expect
SFAS No. 144 to have a material effect on the Company's financial position or
results of operations.
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, 2001 and 2000 and for each of the years
ended December 31, 2001, 2000 and 1999, included in our Annual Report on Form
10-K as of and for the year ended December 31, 2001 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, 2001 filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. We
assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting forward-looking
statements.
OVERVIEW
Persistence Software solves data access problems for distributed and
real-time systems. Persistence solutions help deliver better business visibility
for applications which require current information about customers, products and
suppliers.
7
Persistence provides a suite of data management products that sit between
existing databases - such as Oracle and DB/2 - and application servers - such as
WebLogic and WebSphere. Developers can configure these products to structure and
position business information with optimal efficiency, improving application
server performance and simplifying application distribution while reducing
database costs. By effectively managing enterprise data, users achieve the
benefit of "business visibility" - the ability to manage their business in real
time with data and applications where they need them, when they need them. By
caching data, or moving information stored in back-end computer systems closer
to users, our software dramatically reduces network traffic and data latency,
resulting in both better application performance and faster transaction
processing. POWERTIER application servers support both C++ and Sun Microsystems'
full Java 2 Platform, Enterprise Edition (J2EE, formerly known as Enterprise
Java Beans or EJB) standards to enable businesses to deploy sophisticated C++ or
Java applications, which readily scale and accommodate rapidly increasing
numbers of users. Our EDGEXTEND data management infrastructure product for J2EE
application servers offers a data architecture for IBM's WebSphere and BEA's
WebLogic application servers to support highly distributed and
transaction-oriented applications both within data centers and in remote
locations. Our DYNAMAI Web content accelerator improves the speed and
scalability of electronic commerce Web sites that rely heavily on dynamically
generated content using technologies such as Java Server Pages and Active Server
Pages. Our major customers include AT&T, Cablevision, Cisco, FedEx, Instinet,
Intershop, Lucent, Motorola, Nokia and Salomon Smith Barney.
Our revenues, which consist of software license revenues and service
revenues, totaled $2.2 million in the three months ended March 31, 2002, $4.9
million in the three months ended March 31, 2001, $19.4 million in 2001, $25.3
million in 2000, $14.4 million in 1999, and $10.2 million in 1998. License
revenues consist of licenses of our software products, which generally are
priced based on the number of users or servers. Service revenues consist of
professional services consulting, customer support and training. Because we only
commenced selling application servers in 1997, we have a limited operating
history in the data management infrastructure and application server markets.
We market our software and services primarily through our direct sales
organizations in the United States, the United Kingdom, Germany and Hong Kong.
Revenues from licenses and services to customers outside the United States were
$797,000 in the three months ended March 31, 2002, $2.0 million in the three
months ended March 31, 2001, $7.4 million in 2001, $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 revenue from product
sales to a limited number of customers. Sales of products to our top five
customers accounted for 46% of our total revenues in the three months ended
March 31, 2002, 52% of our total revenues in the three months ended March 31,
2001, 45% of total revenues in 2001, 40% of total revenues in 2000, 35% of total
revenues in 1999, and 55% of total revenues in 1998. In addition, the identity
of our top five customers has changed from year to year. In the future, it is
likely that a relatively few large customers could continue to account for a
relatively large proportion of our revenues.
To date, we have sold our products primarily through our direct sales force,
and we will need to continue to hire sales people, in particular those with
expertise in channel sales, in order to meet our sales goals. In addition, our
ability to achieve significant revenue growth will depend in large part on our
success in establishing and leveraging relationships with OEM partners and other
resellers.
Our critical accounting policies and estimates were discussed in our 2001
Form 10-K. No changes in these policies and estimates have occurred for the
three months ended March 31, 2002.
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 implemented SAB No. 101 in the fourth quarter of the year
ended December 31, 2000. The provisions of SAB No. 101 did not have a material
impact on the Company's consolidated financial position or results of
operations.
We recognize license revenues upon shipment of the software if collection of
the resulting receivable is probable, an executed agreement has been signed, the
fee is fixed or determinable and vendor-specific objective evidence exists to
allocate a portion of the total fee to any undelivered elements of the
arrangement. Undelivered elements in these arrangements typically consist of
services or additional software products. For sales made through distributors,
revenue is recognized upon shipment. Distributors have no right of return. We
recognize revenues from customer training, support and professional services as
8
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 81 employees as of December 31, 2001 and 77 as
of March 31, 2002, representing a decrease of 5%. We have incurred net losses in
each quarter since 1996 and, as of March 31, 2002, had an accumulated deficit of
$59.2 million. We are currently targeting that sales and marketing expenses,
research and development expenses, and general and administrative expenses, will
remain below 2001 spending levels. We are currently targeting to achieve a
modest net profit on a GAAP basis for 2002.
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 and our recently
introduced EDGEXTEND product. 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.
RESULTS OF OPERATIONS
THREE MONTHS (FIRST QUARTERS) ENDED MARCH 31, 2002 AND 2001
Revenues
Our revenues were $2.2 million for the three months ended March 31, 2002 and
$4.9 million for the three months ended March 31, 2001 representing a decrease
of 56%. International revenues were $797,000 for the three months ended March
31, 2002 and $2.0 million for the three months ended March 31, 2001,
representing a decrease of 60%. For the three months ended March 31, 2002,
Salomon Smith Barney and Lucent Technologies accounted for 15% and 10% of total
revenues, respectively. For the three months ended March 31, 2002, sales of
products and services to our top five customers accounted for 46% of total
revenues. For the three months ended March 31, 2001, sales of products and
services to our top five customers accounted for 52% of total revenues.
License Revenues. License revenues were $833,000 for the three months ended
March 31, 2002 and $2.1 million for the three months ended March 31, 2001,
representing a decrease of 61%. License revenues represented 39% of total
revenues for the three months ended March 31, 2002 and 44% of total revenues for
the three months ended March 31, 2001. The decrease in software license revenues
was primarily due to the deferral of license revenue over the next four quarters
for a major contract negotiated in the first quarter of 2002, and decreased
spending on IT infrastructure products by our target customers.
Service Revenues. Our service revenues were $1.3 million for the three
months ended March 31, 2002 and $2.7 million for the three months ended March
31, 2001, representing a decrease of 51%. The decrease in service revenues was
primarily due to various consulting services contracts undertaken in 2001 which
were not repeated in 2002. Service revenues represented 61% of total revenues
for the three months ended March 31, 2002 and 56% of total revenues for the
three months ended March 31, 2001.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of packaging,
documentation and associated shipping costs. Our cost of license revenues was
$27,000 for the three months ended March 31, 2002 and $5,000 for the three
months ended March 31, 2001. As a percentage of license revenues, cost of
license revenues increased to 3% for the three months ended March 31, 2002 from
0.2% for the three months ended March 31, 2001. This increase was largely due to
increased royalty charges.
Cost of Service Revenues. Cost of service revenues consists of personnel,
contractors and other costs related to the provision of professional services,
technical support and training. Our cost of service revenues was $768,000
million for the three months ended March 31, 2002 and $1.2 million for the three
months ended March 31, 2001, representing a decrease of 35%. This decrease was
primarily due to a significant reduction in our use of third party consultants
9
in 2002. As a percentage of service revenues, cost of service revenues were 58%
for the three months ended March 31, 2002 and 43% for the three months ended
March 31, 2001. This increase results primarily from certain fixed service costs
being spread over lower 2002 service revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, benefits, commissions and bonuses earned by sales and marketing
personnel, travel, and marketing and promotional expenses. Our sales and
marketing expenses were $2.4 million for the three months ended March 31, 2002
and $4.3 million for the three months ended March 31, 2001, representing a
decrease of 44%. This decrease was primarily due to a reduction in personnel
related costs, lower commissions, and a decrease in worldwide marketing
activities. Sales and marketing expenses represented 113% of total revenues for
the three months ended March 31, 2002 and 89% of total revenues for the three
months ended March 31, 2001. This increase as a percentage of revenues resulted
primarily from certain fixed costs being spread over lower 2002 revenues. We are
presently targeting that 2002 sales and marketing expense levels will be below
2001 expense levels.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to external software consultants. Our
research and development expenses were $1.1 million for the three months ended
March 31, 2002 and $1.7 million for the three months ended March 31, 2001,
representing a decrease of 36%. This decrease was due to a reduction in domestic
staffing and international contract staff. Research and development expenses
represented 52% of total revenues for the three months ended March 31, 2002 and
36% of total revenues for the three months ended March 31, 2001. This increase
as a percentage of revenues resulted primarily from certain fixed costs being
spread over lower 2002 revenues. We are presently targeting that 2002 research
and development expense levels will be below 2001 expense levels.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance, general and
administrative personnel as well as legal costs, bad debt write-offs and various
costs associated with our status as a public company. Our general and
administrative expenses were $927,000 for the three months ended March 31, 2002
and $1.4 million for the three months ended March 31, 2001, representing a
decrease of 33%. This decrease was due primarily to a reduction in staff related
costs and a decrease in patent litigation related legal fees. General and
administrative expenses represented 43% of total revenues for the three months
ended March 31, 2002 and 28% of total revenues for the three months ended March
31, 2001. This increase as a percentage of revenues resulted primarily from
certain fixed costs being spread over lower 2002 revenues. We are presently
targeting that 2002 general and administrative expense levels will be below 2001
expense levels.
Amortization of Purchased Intangibles. Amortization of purchased intangibles
was $212,000 for the three months ended March 31, 2002 and $718,000 for the
three months ended March 31, 2001, representing a decrease of 70%. The decrease
in amortization expense was principally related to a revaluation and impairment
review in June 2001 which resulted in a write-off of $2.0 million.
Interest and Other Income (Expense). Interest and other income (expense)
consists primarily of earnings on our cash, cash equivalents and short-term
investment balances, offset by interest expense related to obligations under
capital leases and other equipment related borrowings, and various miscellaneous
state and foreign taxes and other expenses. Interest and other income (expense)
was $16,000 for the three months ended March 31, 2002 and $177,000 for the three
months ended March 31, 2001, representing a decrease of 91%. This decrease was
primarily due to a reduction in our overall cash balances and major reductions
in market interest rates. We expect that interest and other income (expense)
will decrease as we continue to use the net proceeds from our initial public
offering and may become a net expense for the remainder of 2002.
Stock-Based Compensation. Certain options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value
for accounting purposes was greater than the stock price as determined by the
Board of Directors on the date of grant or issuance. Total deferred stock
compensation associated with equity transactions as of March 31, 2002 was
$85,000, net of amortization. Deferred stock compensation is being amortized
ratably over the vesting periods of these securities. Amortization expense,
which is included in operating expenses, was $34,000 in the three months ended
March 31, 2002 and $102,000 in the three months ended March 31, 2001. We expect
to record amortization expense related to these securities of approximately
$85,000 for the remainder of 2002.
Provision for Income Taxes. Since inception, we have incurred net operating
losses for federal and state tax purposes and have only recognized minimal tax
provisions within our international subsidiaries. We have placed a full
10
valuation allowance against our net deferred tax assets due to the uncertainty
surrounding the realization of these assets. We evaluate on a quarterly basis
the recoverability of the net deferred tax assets and the level of the valuation
allowance. If and when we determine that it is more likely than not that the
deferred tax assets are realizable, the valuation allowance will be reduced.
QUARTERLY RESULTS OF OPERATIONS
Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate in the future, as a result of a number of factors,
many of which are outside our control. These factors include:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o demand for and market acceptance of our POWERTIER products and other
products we introduce, including EDGEXTEND and DYNAMAI;
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 application server and
data management market;
o our lengthy sales cycle;
o our success in expanding our 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.
The typical sales cycle of our products is long and unpredictable, and is
affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter to gain price concessions. Because a substantial portion of our
costs are relatively fixed and based on anticipated revenues, a failure to book
an expected order in a given quarter would not be offset by a corresponding
reduction in costs and could adversely affect our operating results.
Our license revenues in the first quarter of 2002 were lower than those in
the fourth quarter of 2001. In the future, we expect this trend to continue,
with the fourth quarter of each year accounting for the greatest percentage of
total revenues for the year and with an absolute decline in revenues from the
fourth quarter to the first quarter of the next year.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through our initial
public offering of common stock in June 1999, which totaled $34.1 million in
aggregate net proceeds, and private sales of convertible preferred stock, which
totaled $19.9 million in aggregate net proceeds. We have also financed our
business through borrowings of $655,000 under an equipment financing facility
and capitalized leases. As of March 31, 2002, we had $7.2 million of cash and
cash equivalents and $3.8 million of working capital.
11
Net cash used in operating activities was $48,000 for the three months ended
March 31, 2002 and $4.8 million for the three months ended March 31, 2001. For
the three months ended March 31, 2002, cash used in operating activities was
attributable primarily to net losses offset by an increase in deferred revenue
and depreciation and amortization. For the three months ended March 31, 2001,
cash used in operating activities was attributed primarily to net losses and
decreases in accrued compensation, other accrued liabilities, accounts payable
and deferred revenues. Those decreases were partially offset by a substantial
decrease in accounts receivable and by depreciation and amortization.
Net cash used in investing activities was $80,000 for the three months ended
March 31, 2002 and net cash provided by investing activities was $1.3 million
for the three months ended March 31, 2001. For the three months ended March 31,
2002, net cash used in investing activities was attributable primarily to the
purchase of fixed assets and intangibles. For the three months ended March 31,
2001, cash provided by investing activities was attributable primarily to
decreases in short-term investments which were converted to cash.
Net cash used in financing activities was $84,000 for the three months ended
March 31, 2002 primarily as a result of loan payments partially offset by sales
of common stock as a result of option exercises. Net cash provided by financing
activities was $98,000 for the three months ended March 31, 2001.
We have credit facilities with Comerica Bank. Under these credit facilities,
the Company has a $5.0 million revolving line of credit facility available
through April 30, 2003, and an equipment term loan of $655,000. As of March 31,
2002 we had no borrowings outstanding under the revolving line of credit
facility. As of March 31, 2002 we had $437,000 outstanding under the equipment
term loan. We are required to make principal payments of $21,843 per month, plus
interest at the bank's base rate plus 0.5% per annum payable in 30 monthly
installments. 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 (current assets not including inventory less current liabilities) of
2 to 1. As of March 31, 2002, the Company's tangible net worth fell below the
minimum tangible net worth and the bank waived this event. As of December 31,
2001, we were in compliance with our debt covenants. Borrowings under the
facilities are collateralized by substantially all of the Company's assets.
Currently we have no material commitments for capital expenditures nor do we
anticipate a material increase in capital expenditures and lease commitments.
We are currently targeting that our current cash and cash equivalents 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 this additional financing, we may be required to reduce the scope of our
planned product development and marketing efforts, which could harm our
business.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the other
information contained in this quarterly report on Form 10-Q. The risks and
uncertainties described below are intended to be the ones that are specific to
our company or industry and that we deem to be material, but are not the only
ones that we face.
WE HAVE A LIMITED OPERATING HISTORY IN THE APPLICATION SERVER AND DATA
MANAGEMENT MARKETS.
Because we only commenced selling application servers in 1997 and only
commenced selling DYNAMAI in 2000 and EDGEXTEND in 2002, we have a limited
operating history in the application server and data management markets. We thus
face the risks, expenses and difficulties frequently encountered by companies in
early stages of development, particularly companies in the rapidly changing
software industry. These risks include:
o the timing and magnitude of capital expenditures by our customers and
prospective customers;
o our substantial dependence for revenue from our POWERTIER for C++
product, which was first introduced in 1997 and has achieved only
limited market acceptance;
12
o our substantial dependence for revenue from our POWERTIER for 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 the Java programming language, commonly known as J2EE,
becoming a widely accepted standard in the transactional application
server market; and
o our dependence upon key personnel.
BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NEVER BECOME
OR REMAIN PROFITABLE.
Our revenues may not continue to grow, and we may not be able to achieve or
maintain profitability in the future. We have incurred net losses each year
since 1996. In particular, we incurred losses of $3.3 million in the three
months ended March 31, 2002, $15.1 million in 2001, $16.7 million in 2000, $11.3
million in 1999 and $4.1 million in 1998. As of March 31, 2002, we had an
accumulated deficit of $59.2 million. While we are currently targeting lower
sales and marketing, research and development, and general and administrative
expenses for 2002 as compared to 2001, we will still need to increase our
revenues to become profitable. Because our product market is new and evolving,
we cannot accurately predict either the future growth rate, if any, or the
ultimate size of the market for our products.
WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK AND NOT THROUGH CASH
GENERATED BY OUR OPERATIONS.
Since inception, we have generally had negative cash flow from operations.
To date, we have financed our business primarily through sales of common stock
and convertible preferred stock and not through cash generated by our
operations. We expect to continue to have negative cash flow from operations for
the year ended December 31, 2002.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE.
Based upon our current forecasts and estimates, we are targeting that our
current cash and cash equivalents 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.
13
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
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 quarterly operating results have fluctuated significantly in the past
and may continue to fluctuate significantly in the future as a result of a
number of factors, many of which are outside our control. In prior years, we
have often experienced an absolute decline in revenues from the fourth quarter
to the first quarter of the next year. If our future quarterly operating results
are below the expectations of securities analysts or investors, the price of our
common stock would likely decline. The factors that may cause fluctuations of
our operating results include the following:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o demand for and market acceptance of our POWERTIER products and our
newer DYNAMAI and EDGEXTEND products;
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 application server
and data management markets;
o our lengthy sales cycle;
o our success in maintaining our direct sales force and expanding
indirect distribution channels;
o the mix of direct sales versus indirect distribution channel sales;
o the 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.
14
OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO
IT IS DIFFICULT TO FORECAST OUR REVENUES.
Any delay in sales of our products or services could cause our quarterly
revenues and operating results to fluctuate. The typical sales cycle of our
products is long and unpredictable and requires both a significant capital
investment decision by our customers and our education of potential customers
regarding the use and benefits of our products. Our sales cycle is generally
between three and nine months. A successful sales cycle typically includes
presentations to both business and technical decision makers, as well as a
limited pilot program to establish a technical fit. Our products typically are
purchased as part of a significant enhancement to a customer's information
technology system. The implementation of our products involves a significant
commitment of resources by prospective customers. Accordingly, a purchase
decision for a potential customer typically requires the approval of several
senior decision makers. Our sales cycle is affected by the business conditions
of each prospective customer, as well as the overall economic climate for
technology-related capital expenditures. Due to the relative importance of many
of our product sales, a lost or delayed sale could adversely affect our
quarterly operating results. Our sales cycle is affected by seasonal
fluctuations as a result of our customers' fiscal year budgeting cycles and slow
summer purchasing patterns in Europe.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. In the three months ended March
31, 2002, sales of products and services to our top five customers accounted for
46% of total revenue with Salomon Smith Barney and Lucent Technologies
accounting for 15% and 10% of total revenues respectively. In the three months
ended March 31, 2001, sales of products and services to our top five customers
accounted for 52% of total revenues with Salomon Smith Barney and Intershop
accounting for 20% and 16% of total revenues respectively. In the year ended
December 31, 2001, sales of products and services to Salomon Smith Barney
accounted for 15% of total revenues, sales to Cablevision accounted for 11% of
total revenues and sales to our top five customers accounted for 45% of total
revenues. In the year ended December 31, 2000, sales of products and services to
Salomon Smith Barney accounted for 16% of total revenues and sales to our top
five customers accounted for 40% of total revenues. In the year ended December
31, 1999, sales of products and services to Cisco accounted for 13% of our total
revenues, and sales of products and services to our top five customers accounted
for 35% of total revenues. In addition, the identity of our top five customers
has changed from year to year. If we lose a significant customer, or fail to
increase product sales to an existing customer as planned, we may not be able to
replace the lost revenues with sales to other customers. In addition, because
our marketing strategy is to concentrate on selling products to industry
leaders, any loss of a customer could harm our reputation within the industry
and make it harder for us to sell our products to other companies in that
industry. The loss of, or a reduction in sales to, one or more significant
customers would likely result in a decrease in our revenues.
WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD
AND THE EMERGING MARKET FOR DISTRIBUTED OBJECT COMPUTING, AND IF THESE
TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD SUFFER.
We are focusing certain portions of our marketing efforts on our POWERTIER
for J2EE application server and EDGEXTEND products, which are 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
material portion of our future revenues will come from sales of products based
on the J2EE standard. Thus, our success depends significantly upon broad market
acceptance of distributed object computing in general, and Java application
servers in particular. If J2EE 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
15
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.
One of our EDGEXTEND products is currently in beta testing. Any delays in
releasing products on a generally available basis may materially affect our
future revenues. EDGEXTEND for WebSphere was released in March 2002. EDGEXTEND
for WebLogic is scheduled to be released in June 2002.
WE ARE CURRENTLY TARGETING THAT SOME PORTION OF OUR REVENUES WILL BE DERIVED
FROM SALES OF OUR NEWEST PRODUCT, EDGEXTEND, HOWEVER THERE ARE TECHNICAL AND
MARKET RISKS ASSOCIATED WITH NEW PRODUCTS.
We are currently targeting that sales of our EDGEXTEND products will soon
represent a material percentage of our revenues. New products, like EDGEXTEND,
often contain errors or defects, particularly when first introduced. Any errors
or defects could be serious or difficult to correct and could result in a delay
of product adoption resulting in lost revenues or a delay in gaining market
share, which could harm our revenues and reputation. In addition, market
adoption is often slower for newer products, like EDGEXTEND, than for existing
products.
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO MAINTAIN AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES.
We must maintain a strong direct sales team to generate revenues. In the
last several years, we have experienced significant turnover in our sales team,
and in the third quarter of 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. As a result of our recent
restructuring, a number of our sales people are relatively new and we may not
meet our sales goals. In addition, our recently hired employees may not become
productive, and we may not be able to hire enough qualified individuals in the
future.
BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES
CHANNEL THROUGH OEM PARTNERS AND OTHER RESELLERS, ANY FAILURE TO DEVELOP THIS
CHANNEL MAY RESULT IN LOWER REVENUES.
To date, we have sold our products primarily through our direct sales force,
but our ability to achieve significant revenue growth in the future will depend
in large part on our success in establishing and leveraging relationships with
OEM partners and third parties. It may be difficult for us to establish these
relationships, and, even if we establish these relationships, we will then
depend on the sales efforts of these third parties. In addition, because these
relationships are nonexclusive, these third parties may choose to sell
application servers, data management products or other alternative solutions
offered by our competitors, and not our products. If we fail to successfully
build our third-party distribution channels or if our third party partners do
not perform as expected, our business could be harmed.
BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM
DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES.
Because our products are often incorporated into multi-million dollar
enterprise projects, we depend on the successful and timely completion of these
large projects to fully deploy our products and achieve our revenue goals. These
enterprise projects often take many years to complete and can be delayed by a
variety of factors, including general or industry-specific economic downturns,
our customers' budget constraints, other customer-specific delays, problems with
other system components or delays caused by the OEM or other third-party
partners who may be managing the system deployment. If our customers cannot
successfully implement large-scale deployments, or they determine for any reason
that our products cannot accommodate large-scale deployments or that our
products are not appropriate for widespread use, our business could suffer. In
addition, if an OEM or other third-party partner fails to complete a project
utilizing our product for a customer in a timely manner, our revenues or
business reputation could suffer.
16
BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE J2EE APPLICATION
SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR
THEIR OWN PRODUCTS.
Our success depends on achieving widespread market acceptance of our
POWERTIER for J2EE application server. Because Sun Microsystems controls the
J2EE standard, we need to maintain a good working relationship with Sun
Microsystems to develop future versions of POWERTIER for J2EE, as well as
additional products using J2EE, that will gain market acceptance. In March 1998,
we entered into a license agreement with Sun Microsystems, pursuant to which we
granted Sun Microsystems rights to manufacture and sell, by itself and not
jointly with others, products under a number of our patents, and Sun
Microsystems granted us rights to manufacture and sell, by ourselves and not
jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell some competing products that
would, in the absence of this license agreement, infringe our patents. Because
Sun Microsystems controls the J2EE standard, it could develop the J2EE standard
in a more proprietary way to favor a product offered by its subsidiary,
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,
...NET, 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 or change purchasing decisions. We expect that Microsoft's
presence in the application server market will increase competitive pressure in
this market.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE
HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The markets for our products are intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our 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 (e.g. J2EE);
o ease of integration with customers' existing enterprise systems;
o ease and speed of implementation;
o quality of support and service;
o security;
o company reputation; and
o price.
Our competitors for POWERTIER 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,
17
technical, marketing and other resources, greater name recognition and larger
installed bases of customers than we do. In particular IBM (WebSphere) and BEA
Systems (WebLogic) dominate the application server market. 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.
In the EDGEXTEND market, similar technology is available from a variety of
sources, including the potential for internal development. Company vendors such
as Versant, webGain and Excelon are middleware vendors that offer alternative
data management solutions that directly target EDGEXTEND's market. Because we
enhance standard J2EE application servers, we face the risk that they may
develop similar functionality within their own products.
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 we
currently envision, our business could be harmed. Moreover, critical issues
concerning the commercial use of the Internet, including security, cost,
accessibility and quality of network service, remain unresolved and may
negatively affect the growth of the Internet as a platform for conducting
various forms of electronic commerce. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols to handle increased activity or due to increased government
regulation.
OUR FAILURE TO MANAGE OUR RESOURCES COULD IMPAIR OUR BUSINESS.
Achieving our planned revenue targets and other financial objectives will
place significant demands on our management and other resources. 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 in 2001. 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.
18
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 37% of our revenues came
from sales of products and services outside of the United States for the three
months ended March 31, 2002, approximately 41% of our revenues came from sales
of products and services outside of the United States for the three months ended
March 31, 2001, approximately 38% of our revenues came from sales of products
and services outside of the United States during the year ended December 31,
2001, and approximately 28% of our revenues came from sales of products and
services outside of the United States during each of the years ended December
31, 2000 and 1999. We expect international revenues to continue to represent a
significant portion of our total revenues. To date, almost all of our
international revenues have resulted from our direct sales efforts. In
international markets, however, we expect that we will depend more heavily on
third party distributors to sell our products in the future. The success of our
international strategy will depend on our ability to develop and maintain
productive relationships with these third parties. The failure to develop key
international markets for our products could cause a reduction in our revenues.
Additional risks related to our international expansion and operation include:
o difficulties of staffing and managing foreign operations;
o future dependence on the sales efforts of our third party distributors
to expand business;
o longer payment cycles typically associated with international sales;
o tariffs and other trade barriers;
o failure to comply with a wide variety of complex foreign laws and
changing regulations;
o exposure to political instability and economic downturns;
o failure to localize our products for foreign markets;
o restrictions under U.S. law on the export of technologies;
o potentially adverse tax consequences;
o reduced protection of intellectual property rights in some countries;
and
o currency fluctuations.
The majority of our product sales outside the United States are denominated
in U.S. dollars. We do not currently engage in any hedging transactions to
reduce our exposure to currency fluctuations as a result of our foreign
19
operations. We are not currently ISO 9000 compliant, nor are we attempting to
meet all foreign technical standards that may apply to our products. Our failure
to develop our international sales channel as planned could cause a decline in
our revenues.
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION
MAY BE IMPAIRED.
Our success depends on our ability to protect our proprietary rights to the
technologies used in our products, and yet the measures we are taking to protect
these rights may not be adequate. If we are not adequately protected, our
competitors could use the intellectual property that we have developed to
enhance their products and services, which could harm our business. We rely on a
combination of patents, copyright and trademark laws, trade secrets,
confidentiality provisions and other contractual provisions to protect our
proprietary technology, but these legal means afford only limited protection.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. In addition, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States. Litigation may be necessary to
enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
WE MAY BE SUED FOR PATENT INFRINGEMENT.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. As the number of entrants
into our market increases, the possibility of an intellectual property claim
against us grows. For example, we may be inadvertently infringing a patent of
which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our current stockholders sell substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
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, or at all, through the sale of securities. As of March
31, 2002, we had approximately 20,153,087 shares of common stock outstanding.
Virtually all of our shares, other than shares held by affiliates, are freely
tradeable. In addition, shares held by affiliates are tradeable, subject to the
volume and other restrictions of Rule 144.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
Our common stock 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.
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;
20
o changes in estimates of our financial performance or changes in
recommendations by securities analysts;
o market conditions and expectations regarding capital spending in the
software industry and in our customers' industries; and
o adoption of new accounting standards affecting the software industry.
The market prices of the common stock of many companies in the software and
Internet industries have experienced extreme price and volume fluctuations,
which have often been unrelated to these companies' operating performance. In
the past, securities class action litigation has often been brought against a
company after a period of volatility in the market price of its stock. We may in
the future be a target of similar litigation. Securities litigation could result
in substantial costs and divert management's attention and resources, which
could harm our business.
THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER.
Provisions in our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
o establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
o authorizing the board to issue preferred stock;
o prohibiting cumulative voting in the election of directors;
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;
21
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.
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 GENERAL OPERATIONS, 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 our cash
equivalents are invested in short-term investment accounts. If market interest
rates had changed by approximately ten percent in the three months ending March
31, 2002, our financial results would have changed by approximately $3,000.
Foreign Currency Fluctuations. We operate in several international locations
using local currencies for the payment of employees and suppliers, however, we
did not have any significant net balances that are due or payable in foreign
currencies at March 31, 2002. A hypothetical ten percent change in foreign
currency rates would have changed the results of operations by approximately
$6,000 for the three months ended March 31, 2002. We do not hedge any of our
foreign currency exposures.
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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.
(d) Use of Proceeds
Our registration statement on Form S-1, SEC File No. 333-76867, for our
initial public offering of common stock became effective on June 24, 1999. We
registered and sold an aggregate of 3,450,000 shares of common stock under the
registration statement at a per share price of $11.00. Our underwriters were
BancBoston Robertson Stephens, U.S. Bancorp Piper Jaffray, and Soundview
Technology Group. Offering proceeds, net of aggregate underwriting commissions
and discounts of $2.7 million and other offering transaction expenses of $1.1
million, were $34.1 million. None of the underwriting commissions and discounts
or other offering transaction expenses were direct or indirect payments to our
directors, officers, or holders of 10% or more of our stock. From June 24, 1999
through March 31, 2002, we have used the net offering proceeds as follows:
Working capital expenditures....................... $21.7 million
Acquiring property and equipment................... 2.3 million
Acquiring technologies............................. 2.9 million
--------------
26.9 million
Cash and cash equivalents.......................... 7.2 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.
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:
10.16 First Amendment to the Restated Loan and Security Agreement
between Persistence and Comerica Bank.
(b) REPORTS ON FORM 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ Christine Russell
------------------------------
CHRISTINE RUSSELL
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: May 15, 2002
24
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
10.16 First Amendment to the Restated Loan and Security Agreement
between Persistence and Comerica Bank.
25