UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2004
OR
[ ] TRANSITION REPORT UNDER 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 small business issuer 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)
(650) 372-3600
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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, 2004, there were 2,715,918 shares of the registrant's common
stock outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
INDEX
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004 AND
DECEMBER 31, 2003.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
ITEM 3. CONTROLS AND PROCEDURES.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
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)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,875 $ 5,680
Accounts receivable, net 1,736 1,498
Prepaid expenses and other current assets 214 258
------------ ------------
Total current assets 6,825 7,436
Property and equipment, net 106 95
Purchased intangibles, net 50 59
Other assets 37 37
------------ ------------
Total assets $ 7,018 $ 7,627
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 278 $ 329
Accrued compensation and related benefits 456 338
Other accrued liabilities 591 924
Deferred revenues net of long-term portion 2,504 2,565
Current portion of long-term obligations 39 334
------------ ------------
Total current liabilities 3,868 4,490
Long-term liabilities:
Long-term portion of deferred revenues 32 84
Long-term obligations 14 18
------------ ------------
Total long-term liabilities 46 102
------------ ------------
Total liabilities 3,914 4,592
------------ ------------
Stockholders' equity:
Common stock 67,132 67,112
Accumulated deficit (64,020) (64,076)
Accumulated other comprehensive loss (8) (1)
------------ ------------
Total stockholders' equity 3,104 3,035
------------ ------------
Total liabilities and stockholders' equity $ 7,018 $ 7,627
============ ============
See notes to condensed consolidated financial statements.
3
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
2004 2003
------------ ------------
Revenues:
Licenses $ 842 $ 1,294
Service 1,214 1,229
------------ ------------
Total revenues 2,056 2,523
------------ ------------
Cost of revenues:
Licenses 20 39
Service 266 477
------------ ------------
Total cost of revenues 286 516
------------ ------------
Gross profit 1,770 2,007
------------ ------------
Operating expenses:
Sales and marketing 782 1,531
Research and development 570 849
General and administrative 474 643
Purchased intangibles (110) --
------------ ------------
Total operating expenses 1,716 3,023
------------ ------------
Income/(loss) from operations 54 (1,016)
Interest income 8 19
Interest and other expense (6) (11)
------------ ------------
Income/(loss) before income taxes 56 (1,008)
Income taxes -- --
------------ ------------
Net income/(loss) $ 56 $ (1,008)
============ ============
Basic net income/(loss) per share $ 0.02 $ (0.42)
============ ============
Diluted net income/(loss) per share $ 0.02 $ (0.42)
============ ============
Shares used in calculating basic net
income/(loss) per share 2,713 2,403
============ ============
Shares used in calculating diluted net
income/(loss) per share 2,734 2,403
============ ============
See notes to condensed consolidated financial statements.
4
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ 56 $(1,008)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 16 141
Amortization of deferred stock compensation -- 6
Release of obligation incurred to acquire purchased intangibles (110) --
Loss on sale of fixed assets 6 --
Issuance of warrants and options to non-employees and other (1) (8)
Changes in operating assets and liabilities:
Accounts receivable, net (238) (743)
Prepaid expenses and other current assets 44 156
Accounts payable (51) (32)
Accrued compensation and related benefits 118 48
Other accrued liabilities (334) (161)
Deferred revenues (113) (102)
-------- --------
Net cash used in operating activities (607) (1,703)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (24) (19)
-------- --------
Net cash used in investing activities (24) (19)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 20 15
Repayment of obligations incurred to acquire purchased intangibles (160) --
Repayment of long term obligations (27) (87)
-------- --------
Net cash used in financing activities (167) (72)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (7) (8)
-------- --------
CASH AND CASH EQUIVALENTS:
Net decrease (805) (1,802)
Beginning of period 5,680 8,903
-------- --------
End of period $ 4,875 $ 7,101
======== ========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BUSINESS
Persistence provides data access and caching infrastructure software
specifically designed to eliminate data access bottlenecks such as redundant or
inefficient database queries that cause poor application performance.
Persistence's technology may simplify and optimize access to complex enterprise
data for custom applications. Persistence's products provide a "data services"
layer that sits between relational databases such as Oracle and DB2 and
application servers. This data services layer provides integrated
object-to-relational mapping, caching, and cache synchronization with automated
cache management. Persistence products may support cross-platform deployment of
high-performance, custom applications written in Java, C++ or C#, including
those built for BEA WebLogic, IBM WebSphere or Microsoft .NET.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this filing on
Form 10-QSB as of March 31, 2004 and for the three month periods ended March 31,
2004 and 2003 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, 2003 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, 2003
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, 2004, its condensed consolidated
results of operations for the three month periods ended March 31, 2004 and 2003,
and its condensed consolidated cash flows for the three month periods ended
March 31, 2004 and 2003, 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 INCOME/(LOSS) PER SHARE
Basic net income/(loss) per common share is computed by dividing net
income/(loss) by the weighted average number of common shares outstanding for
the period. Diluted net loss per common share for the three months ended March
31, 2003 was the same as basic net loss per common share since the effect of any
potentially dilutive securities is excluded as they are anti-dilutive because of
the Company's net losses.
As of March 31, 2004, the Company had securities outstanding which could
potentially dilute basic earnings per share in the future. Such outstanding
securities consist of the following (in thousands):
MAR. 31, MAR. 31,
2004 2003
-------- --------
Outstanding options 364 327
Warrants 224 134
-------- --------
Total 588 461
======== ========
6
4. ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for stock based compensation granted to employees and
directors under the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, as amended by SFAS 148 ACCOUNTING FOR
STOCK-BASED COMPENSATION, TRANSITION AND DISCLOSURE, requires the disclosure of
pro forma net loss as if the Company had adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions for options outstanding under the 1997
Stock Plan:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
Risk Free Interest............................... 1.93% 1.87%
Expected Life after vesting (years).............. 2.50 2.50
Expected Volatility.............................. 131% 155%
Expected Dividend................................ $0 $0
The Company's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of the
awards granted had been amortized to expense over the vesting period of the
awards, pro forma net loss (net of amortization of deferred compensation expense
already recorded for the three months ended March 31, 2004 and 2003, as
discussed above) would have been approximately as follows (in thousands, except
for per share data):
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
--------- ---------
Net loss as reported................................ $ 56 $ (1,008)
Add: Stock-based employee compensation expense
included in reported loss ....................... -- 6
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards................................... (138) (117)
--------- ---------
Pro forma net loss.................................. $ (82) $ (1,119)
========= =========
Basic net loss applicable to common shareholders per share:
As reported......................................... $ 0.02 $ (0.42)
Pro forma........................................... $ (0.03) $ (0.47)
Diluted net loss applicable to common shareholders per share:
As reported......................................... $ 0.02 $ (0.42)
Pro forma........................................... $ (0.03) $ (0.47)
The Company accounts for stock-based awards to consultants using the
multiple option method as described by FASB Interpretation No. 28. Stock-based
compensation expense is recognized as earned. At each reporting date, the
Company re-values the stock-based compensation using the Black-Scholes
option-pricing model for stock based awards that have not fully vested. As a
result, the stock-based compensation expense will fluctuate as the fair market
value of the Company's common stock fluctuates.
7
5. COMPREHENSIVE INCOME /(LOSS)
The components of comprehensive income/(loss), consisting of the Company's
reported net income/(loss) and unrealized gains or losses in the translation of
foreign currencies, are as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
--------- ---------
Net income/(loss)................................... $ 56 $ (1,008)
Other comprehensive income (loss) .................. (7) 8
--------- ---------
Total comprehensive income/(loss)................... $ 49 $ (1,000)
========= =========
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation Number ("FIN") 46, "Consolidation of Variable Interest
Entities", and a revised interpretation of FIN 46 ("FIN 46R") in December 2003
(collectively "FIN 46"). FIN 46 addresses consolidation of variable interest
entities. FIN 46 provides guidance for determining when a primary beneficiary
should consolidate a variable interest entity or equivalent structure that
functions to support the activities of the primary beneficiary. The provisions
of FIN 46 are effective immediately for all variable interest entities created
after January 31, 2003. It applies in the first year or interim period ending
after December 15, 2003 to variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003. The Company
did not have interest in any variable interest entities as of March 31, 2004,
and the adoption of FIN 46 did not have a material effect on the Company's
financial statements.
7. INDEMNIFICATION
In its agreements with customers, the Company generally warrants that its
software products will perform in all material respects in accordance with its
standard published specifications in effect at the time of delivery of the
licensed products to the customer. The Company also typically warrants that its
maintenance services will be performed consistently with its maintenance policy
in effect at the time those services are delivered. The Company believes its
maintenance policy is consistent with generally accepted industry standards. If
necessary, the Company would provide for the estimated cost of product and
service warranties based on specific warranty claims and claim history, however,
the Company has not incurred significant expense under its product or services
warranties. As a result, the Company believes the estimated fair value of these
warranty provisions is minimal.
The Company's customer agreements customarily provide for indemnification of
customers for intellectual property infringement claims. Such agreements
generally limit the scope of the available remedies to a variety of
industry-standard methods, including but not limited to product usage, a right
to control the defense or settlement of any claim, and a right to replace or
modify the infringing products to make them non-infringing. The Company has not
incurred significant expenses related to these indemnification agreements and no
material claim for such indemnifications is outstanding as of March 31, 2004. As
a result, the Company believes the estimated fair value of these indemnification
provisions is minimal.
8. SUBSEQUENT EVENTS
On April 30, 2004, the Company renewed its credit facilities with a bank.
Under the renewed facilities the Company continues to have a revolving line of
credit facility of up to $1.5 million available through May 31, 2005. The bank's
renewed credit facilities require the Company, among other things, to maintain
certain working capital and profitability covenants. Borrowings under the
facility are collateralized by substantially all of the Company's assets.
8
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, 2003 and 2002 and for each of the years
ended December 31, 2003, 2002 and 2001, included in our Annual Report on Form
10-K as of and for the year ended December 31, 2003 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-QSB 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-QSB and our Annual Report on Form 10-K as of and for
the year ended December 31, 2003 filed with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. We assume no obligation to update these forward-looking statements
to reflect actual results or changes in factors or assumptions affecting
forward-looking statements.
OVERVIEW
Persistence provides data access and caching infrastructure software
specifically designed to eliminate data access bottlenecks such as redundant or
inefficient database queries that cause poor application performance.
Persistence's technology may simplify and optimize access to complex enterprise
data for custom applications. Persistence's products provide a "data services"
layer that sits between relational databases such as Oracle and DB2 and
application servers. This data services layer provides integrated
object-to-relational mapping, caching, and cache synchronization with automated
cache management. Persistence products may support cross-platform deployment of
high-performance, custom applications written in Java, C++ or C#, including
those built for BEA WebLogic, IBM WebSphere or Microsoft .NET.
THE CURRENT ECONOMIC ENVIRONMENT
The economic climate in which we operate has been difficult over the last
several years, and capital spending has decreased dramatically. This has had a
pronounced effect on our ability to generate new license fees, as IT budgets
have been frozen and large capital expenditures like those required to purchase
some of our products have been quite limited. Additionally, competition for
these more limited sales opportunities has increased, and we have seen intense
price competition both for new licenses and for support services. While we
believe our installed base continues to represent a solid recurring revenue
opportunity, we cannot provide any assurance that these pressures on IT spending
will ease, or that the general economic climate will improve. Continued
competitive pressure and a weak economy could have a continuing pronounced
effect on our operating results. We have undertaken a variety of cost reduction
measures designed to bring our operating expenses in line with our perceptions
of the business climate. Some of the measures taken include workforce
reductions.
REVENUES
Our revenues, which consist of software license revenues and service
revenues, totaled $2.1 million for the three months ended March 31, 2004 and
$9.3 million in 2003. License revenues consist of licenses of our software
products, which generally are priced based on the number of users or central
processing units deploying our software. Service revenues consist of
professional services consulting, customer support and training. Our two major
products, POWERTIER and EdgeXtend, are based on a common technology platform for
application data management. They differ mainly in that POWERTIER contains a
proprietary, bundled application server, whereas EDGEXTEND is optimized to
integrate with third party application servers, such as IBM's WebSphere and
BEA's WebLogic application servers. We currently expect that sales of our older
POWERTIER application server products will continue to contribute to our
revenues, but that sales of our newer EDGEXTEND and DIRECTALERT products will
contribute a growing percentage of our revenues over the next several quarters.
Because a substantial portion of our revenues result from software license
revenue from a limited number of customers, the identity of which change from
quarter to quarter, in any given quarter the percentage contribution of
POWERTIER, EDGEXTEND and DIRECTALERT to total license revenues varies, sometimes
dramatically.
9
REVENUES FROM SALES OF PRODUCTS OUTSIDE THE UNITED STATES
We market our software and services primarily through our direct sales
organizations in the United States and the United Kingdom.
Revenues from licenses and services to customers outside the United States
were:
THREE MONTHS ENDED MARCH 31, REVENUES % OF TOTAL REVENUES
---------------------------- -------- -------------------
2004 $811,000 39%
2003 1.6 million 64
Sales of our products to customers in Europe declined by 50% in the three
months ended March 31, 2004 from the three months ended March 31, 2003. This
decrease was primarily due to the fact that we recognized $585,000 in revenues
from one major contract in the first quarter of 2003 and we did not receive the
same revenues in the first quarter of 2004. Our future success will depend, in
part, on our successful development of international markets for our products.
LIMITED NUMBER OF CUSTOMERS
Historically, we have received a substantial portion of our revenues from a
limited number of customers.
Sales of products to our top five customers accounted for:
THREE MONTHS ENDED MARCH 31, % OF TOTAL REVENUES
---------------------------- -------------------
2004 47%
2003 52
In addition, the identity of our top five customers has changed from year to
year. In the future, it is likely that a relatively few large customers could
continue to account for a relatively large proportion of our revenues and these
customers are likely to differ year to year.
We had 38 total employees as of March 31, 2004. In 2003, we made staff
reductions across all functional areas of our business in order to manage
operating expenses and conserve cash in response to continued uncertainty in IT
spending, which has affected our license revenue. We had 68 total employees as
of December 31, 2002 and 39 as of December 31, 2003, representing a decrease of
43%. This decrease was due primarily to a workforce reduction during the third
and fourth quarters of 2003 to cut costs. We have incurred net losses in each
year since 1996 and as of December 31, 2003, had an accumulated deficit of $64.1
million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an ongoing basis, management evaluates its estimates
and judgments, including those related to revenue recognition, bad debts,
intangible assets, income taxes, restructuring costs, and contingencies and
litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
REVENUE RECOGNITION. We recognize revenues in accordance with the American
Institute of Certified Public Accounts' Statement of Position 97-2, "Software
Revenue Recognition," as amended. Future implementation guidance relating to
these standards or any future standards may result in unanticipated changes in
our revenue recognition practices, and these changes could affect our future
revenues and earnings.
10
Our revenue recognition policy is significant because our revenue is the key
component of our results of operations. In addition, our revenue recognition
determines the timing of certain expenses, such as commissions. We follow
specific and detailed guidelines in measuring and recognizing revenue. We
recognize license revenues upon shipment of the software if collection of the
resulting receivable is probable, an agreement has been executed, the fee is
fixed or determinable and vendor-specific objective evidence exists to allocate
a portion of the total fee to any undelivered elements of the arrangement.
Undelivered elements in these arrangements typically consist of services. For
sales made through distributors, revenue is recognized upon shipment.
Distributors have no right of return. Royalty revenues are recognized when the
software or services has been delivered, collection is reasonably assured and
the fees are determinable. We recognize revenues from customer training, support
and professional services as the services are performed. We generally recognize
support revenues ratably over the term of the support contract. If support or
professional services are included in an arrangement that includes a license
agreement, amounts related to support or professional services are allocated
based on vendor-specific objective evidence. Vendor-specific objective evidence
for support and professional services is based on the price at which such
elements are sold separately, or, when not sold separately, the price
established by management having the relevant authority to make such decision.
While more infrequent, arrangements that require significant modification or
customization of software are recognized under the completion of contract
method.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. A significant portion of our receivables
are concentrated with a small number of customers. Our bad debt policy requires
that we maintain a specific allowance for certain doubtful accounts and a
general allowance for the majority of the non-specifically reserved accounts.
These allowances provide for estimated losses resulting from the inability of
our customers to make required payments. We analyze such factors as historical
bad debt experience, customer payment patterns and current economic trends. This
analysis requires significant judgment. If the financial condition of our
customers were to deteriorate further, additional allowances would generally be
required resulting in future losses that are not included in our allowances for
doubtful accounts at March 31, 2004 and December 31, 2003.
PURCHASED TECHNOLOGY AND INTANGIBLES. Our business acquisitions typically
resulted in goodwill and other intangible assets. The determination of the
recoverability of such intangible assets requires management to make estimates
and assumptions about fair value that affect our consolidated financial
statements and operating results.
STOCK COMPENSATION. We account for stock-based awards to employees using the
intrinsic value method in accordance with APB No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. Accordingly, no accounting recognition is given to employee
stock options granted with an exercise price equal to fair market value of the
underlying stock on the grant date. Upon exercise, the net proceeds and any
related tax benefit are credited to stockholders' equity. Current proposed
regulations indicate that stock options granted to both employees and
non-employees will need to be valued at their fair value and included in
operating expenses. When these proposed regulations become final, material
differences in our expenses relating to equity compensation may result if
different estimates and assumptions are required or if a different valuation
model is used. Information about the impact on our operating results of using
the alternative of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, is
included in Note 4 of the "Notes to Condensed Consolidated Financial
Statements," included elsewhere in this report.
INCOME TAXES. Our income tax policy records the estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets, as well as
operating loss and tax credit carry-forwards. We follow specific and detailed
guidelines regarding the recoverability of any tax assets recorded on the
balance sheet and provide any necessary allowances as required.
11
RESULTS OF OPERATIONS
The following table sets forth statements of operations data for the three
months ended March 31, expressed as a percentage of total revenues:
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
---------- ----------
Revenues:
License............................................. 41% 51%
Service............................................. 59 49
---------- ----------
Total revenues.................................. 100% 100%
---------- ----------
Cost of revenues:
License............................................. 1% 2%
Service............................................. 13 19
---------- ----------
Total cost of revenues.......................... 14% 21%
---------- ----------
Gross profit.......................................... 86% 79%
Operating expenses:
Sales and marketing................................. 38% 61%
Research and development............................ 28 34
General and administrative.......................... 23 25
Purchased intangibles............................... (5) --
Total operating expenses........................ 84% 120%
---------- ----------
Income/(loss) from operations......................... 2 (41)
Interest income....................................... -- 1
Interest and other expense............................ -- --
---------- ----------
Income/(loss) before income taxes..................... 2 (40)
Income taxes.......................................... -- --
---------- ----------
Net income/(loss)..................................... 2% (40)%
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
REVENUES
($ IN THOUSANDS)
% CHANGE
2004 2003 - 2004 2003
----------- ----------- -----------
Revenues:
License..................... $ 842 (35)% $ 1,294
Service..................... 1,214 (1) 1,229
----------- -----------
Total Revenues ........... $ 2,056 (19)% $ 2,523
----------- -----------
Our total revenues declined by 19% in the three months ended March 31, 2004
as compared to the same period in 2003. For the three months ended March 31,
2004, sales to JP Morgan Chase accounted for 14% of total revenues, and sales to
our top five customers accounted for 47% of total revenues. For the three months
ended March 31, 2003, sales to Adobe Systems accounted for 23% of total
revenues, sales to JP Morgan Chase accounted for 10% of total revenues, and
sales to our top five customers accounted for 52% of total revenues.
LICENSE REVENUES. License revenues generally are priced based on the number
of users or central processing units deploying our software. License revenues
declined by 35% to $842,000 in the three months ended March 31, 2004 as compared
to $1.3 million in the three months ended March 31, 2003. The decrease in
software license revenues was primarily due to the fact that our target
customers are those data- and transaction-intensive companies that are either
building a new project or contemplating a rearchitecture of their current system
in order improve their data management performance. We believe that continued
industry-wide downturn in spending on IT infrastructure products has caused many
of these target customers to delay these large IT projects, which affected our
license revenues.
12
SERVICE REVENUES. Service revenues consist of professional services
consulting, customer support and training. Our service revenues were flat at
$1.2 million in each of the three months ended March 31, 2004 and the three
months ended March 31, 2003.
INTERNATIONAL REVENUES. International revenues were $811,000 for the three
months ended March 31, 2004 and $1.6 million for the three months ended March
31, 2003, representing a decrease of 50%. The decrease in international revenues
from 2003 to 2004 was primarily attributable to the fact that we recognized
$585,000 in revenues from one major contract in the first quarter of 2003 and we
did not receive the same revenues in the first quarter of 2004.
COST OF REVENUES
% CHANGE
2004 2003 - 2004 2003
----------- ----------- -----------
License..................... $ 20 (49)% $ 39
Service..................... 266 (44) 477
----------- ----------- -----------
Total cost of revenues...... 286 (45) 516
----------- -----------
Gross profit................ $ 1,770 (12)% $ 2,007
----------- -----------
COST OF LICENSE REVENUES. Cost of license revenues consists of royalties,
packaging, documentation and associated shipping costs and the amortization of
third party software embedded in our software. Cost of license revenues as a
percentage of license revenues may vary between periods due to royalty charges
from third party software vendors.
COST OF SERVICE REVENUES. Cost of service revenues consists of personnel,
contractors and other costs related to the provision of professional services,
technical support and training. The 44% decrease in cost of services revenues
from the first three months of 2003 to the first three months of 2004 was
primarily due to a $211,000 reduction in staffing and personnel related costs.
As a percentage of service revenues, cost of service revenues was 13% for the
three months ended March 31, 2004 and 19% for the three months ended March 31,
2003.
OPERATING EXPENSES
% CHANGE
2004 2003 - 2004 2003
----------- ----------- -----------
Sales and marketing............... $ 782 (49)% $ 1,531
Research and development.......... 570 (33) 849
General and administrative........ 474 (26) 643
Purchased intangibles............. (110) (100) --
----------- ----------- -----------
Total operating expenses........ $ 1,716 (43)% $ 3,023
----------- -----------
SALES AND MARKETING. Sales and marketing expenses consist of salaries,
benefits, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. The 49% decrease in sales
and marketing expenses from the first three months of 2003 to the first three
months of 2004 was primarily due to a $526,000 reduction in staffing and
personnel related costs and a $148,000 reduction in marketing and promotional
expenses. Sales and marketing expenses represented 38% of total revenues for the
three months ended March 31, 2004 and 61% of total revenues for the three months
ended March 31, 2003. We are presently targeting that 2004 sales and marketing
expense levels will be lower than comparable 2003 expense levels because as of
April 2004 we had 14 sales and marketing employees as compared to an average of
22 such employees during 2003.
RESEARCH AND DEVELOPMENT. Research and development expenses consist of
salaries and benefits for software developers, technical managers and quality
assurance personnel as well as payments to external software consultants. The
33% decrease in research and development expenses from the first three months of
2003 to the first three months of 2004 was primarily due to a $239,000 reduction
in staffing and personnel related costs. Research and development expenses
represented 28% of total revenues for the three months ended March 31, 2004 and
34% of total revenues for the three months ended March 31, 2003. We are
presently targeting that 2004 research and development expense levels will be
lower than comparable 2003 expense levels because as of April 2004 we had 17
research and development employees as compared to an average of 22 such
employees during 2003.
13
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
salaries, benefits and related costs for our finance, administrative and
executive management personnel, legal costs, accounting costs, bad debt
write-offs and various costs associated with our status as a public company. The
26% decrease in general and administrative expenses from the three months ended
March 31, 2003 to the three months ended March 31, 2004 was primarily due to a
$95,000 reduction in staffing and personnel related costs. General and
administrative expenses represented 23% of total revenues for the three months
ended March 31, 2004 and 25% of total revenues for the three months ended March
31, 2003.
PURCHASED INTANGIBLES. Purchased intangibles expenses (reversal) were
$(110,000) for the three months ended March 31, 2004 and nil for the three
months ended March 31, 2003. In March 2004, we renegotiated a long-term
obligation for third party software that was fully expensed in prior periods.
This negotiation resulted in a reversal of $110,000 of the total amounts
previously expensed.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense)
consists of earnings on our cash and cash equivalents, offset by interest
expense related to obligations under capital leases and other equipment-related
borrowings and other expenses. Interest and other income (expense) was $2,000
for the three months ended March 31, 2004 and $8,000 for the three months ended
March 31, 2003.
STOCK-BASED COMPENSATION. Some options granted and common stock issued in
the past have been considered to be compensatory, as the estimated fair value of
the stock price for accounting purposes was greater than the fair market value
of the stock as determined by the Board of Directors on the date of grant or
issuance. We had no deferred stock compensation associated with equity
transactions as of March 31, 2004 and $25,000 as of March 31, 2003, net of
amortization. Deferred stock compensation was amortized ratably over the vesting
periods of these securities. Amortization expense, which is included in
operating expenses, was nil for the three months ended March 31, 2004 and $6,000
for the three months ended March 31, 2003.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating
losses for federal and state tax purposes and have only recognized minimal tax
provisions within our international subsidiaries. We have placed a full
valuation allowance against our net deferred tax assets due to the uncertainty
surrounding the realization of these assets. We evaluate on a quarterly basis
the recoverability of the net deferred tax assets and the level of the valuation
allowance. If and when we determine that it is more likely than not that the
deferred tax assets are realizable, the valuation allowance will be reduced.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, we had $4.9 million of cash and cash equivalents as
compared to $5.7 million as of December 31, 2003.
Net cash used in operating activities was $607,000 for the three months
ended March 31, 2004, as compared to $1.7 million for the three months ended
March 31, 2003. The main reason for the decrease in net cash used in operating
activities in the first three months of 2004 was an improvement in our quarterly
net loss position.
Net cash used in investing activities was not significant for the three
months ended March 31, 2004 or for the three months ended March 31, 2003.
Net cash used in financing activities was $167,000 for the three months
ended March 31, 2003, because we renegotiated and paid off in full a long-term
obligation for third party software. Net cash used in financing activities was
$72,000 for the three months ended March 2003 which consisted mainly of $87,000
in repayments of long-term obligations.
We have a revolving credit facility with Comerica Bank of up to $1.5 million
which is available through May 31, 2005 under which no borrowings were
outstanding as of March 31, 2004. We also have a $149,000 equipment term loan,
under which $34,000 was outstanding as of March 31, 2004. This facility is an 18
month term loan with principal payments of $8,229 per month beginning on
February 1, 2003 plus interest at the bank's base rate plus 1% per annum. As of
March 31, 2004 we were in compliance with our debt covenants. On April 30, 2004
we revised our covenant structure with the bank. This new structure requires us,
among other things, to maintain certain working capital and profitability
covenants. We expect to meet these covenants if we are able to achieve our
revenues and accounts receivable collection targets. Borrowings under the
facility are collateralized by substantially all of our assets.
14
We are currently targeting that our current cash and cash equivalents will
be sufficient to meet our anticipated cash needs through at least March 31,
2005, provided that we meet our targets with respect to revenues and accounts
receivable collections.
If we experience difficulties in achieving our targets with respect to
revenues and accounts receivable collections, our cash and cash equivalents may
not be sufficient to meet our anticipated cash needs. Accordingly, our operating
plans could be restricted and our business could be harmed. If cash generated
from operations is insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity or debt securities or to obtain an additional
credit facility. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to holders of common stock, and the term of this debt could impose
restrictions on our operations. The sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders, and we
may not be able to obtain additional financing on acceptable terms, if at all.
If we are unable to obtain this additional financing, our business could be
jeopardized.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this quarterly report on Form 10-QSB
and in our annual report on Form 10-K for the year ended December 31, 2003, the
following factors should be considered carefully in evaluating our business and
prospects.
WE MAY NOT ACHIEVE OUR SALES TARGETS.
Our target customers are those data- and transaction-intensive companies
that are either building a new project or re-architecting their current system
in order improve their data management performance. Thus, anything that would
cause these target customers to defer these projects, such as constrained
budgets, will negatively affect our product sales. In addition, our ability to
achieve our sales targets are affected by:
o the timing and magnitude of capital expenditures by our customers and
prospective customers;
o our need to achieve market acceptance for our new product
introductions, including EDGEXTEND and DIRECTALERT;
o our dependence for revenue from our POWERTIER product, which has
achieved only limited market acceptance;
o our need to expand our distribution capability through various sales
channels, including a direct sales organization, original equipment
manufacturers, third party distributors, independent software vendors
and systems integrators;
o our unproven ability to anticipate and respond to technological and
competitive developments in the rapidly changing market for dynamic
data management;
o our unproven ability to compete in a highly competitive market;
o the decline in spending levels in the software infrastructure market;
o our dependence upon key personnel.
IF WE ARE NOT ABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS TO FUND OUR
BUSINESS AND FAIL TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, OUR BUSINESS COULD
FAIL.
Since inception, we have generally had negative cash flow from operations.
To date, we have financed our business primarily through sales of common stock
and convertible preferred stock and not through cash generated by our
operations. We are currently targeting that our current cash and cash
equivalents will be sufficient to meet our anticipated cash needs through at
least March 31, 2005 provided that we meet our targets with respect to revenues
and accounts receivable collections.
15
If we experience difficulties in achieving our revenue and accounts
receivable targets, our cash and cash equivalents may not be sufficient to meet
our anticipated cash needs. Accordingly, our operating plans could be restricted
and our business could be harmed. If cash generated from operations is
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities or to obtain a credit facility. If
additional funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and the term of this debt could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders, and we may not be able to
obtain additional financing on acceptable terms, if at all. If we are unable to
obtain this additional financing, our business could be jeopardized.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY DEPRESS THE PRICE OF OUR
COMMON STOCK.
Our quarterly operating results have fluctuated significantly in the past
and may continue to fluctuate significantly in the future as a result of a
number of factors, many of which are outside our control. The timing of our
sales is governed in part by our customers' capital spending budgets and we have
been experiencing an absolute decline in revenues from quarter to quarter. If
our future quarterly operating results are below the expectations of securities
analysts or investors, the price of our common stock would likely decline. In
addition to the other risk factors described in this prospectus, additional
factors that may cause fluctuations of our operating results include the
following:
o our ability to close relatively large sales on schedule;
o delays or deferrals of customer orders or deployments;
o delays in shipment of scheduled software releases;
o shifts in demand for and market acceptance among our various products,
including our newer products, EDGEXTEND and DIRECTALERT, and our older
POWERTIER product;
o introduction of new products or services by us or our competitors;
o annual or quarterly budget cycles of our customers or prospective
customers;
o the level of product and price competition in the application server
and data management markets;
o our lengthy sales cycle;
o our success in maintaining our direct sales force and expanding
indirect distribution channels;
o the mix of direct sales versus indirect distribution channel sales;
o the possible loss of sales people;
o the mix of products and services licensed or sold;
o the mix of domestic and international sales; and
o our success in penetrating international markets and general economic
conditions in these markets.
OUR SALES CYCLE IS LONG AND UNPREDICTABLE, SO IT IS DIFFICULT TO FORECAST OUR
REVENUES.
We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. Any delay in sales
of our products or services could cause our quarterly revenues and operating
results to fluctuate. The typical sales cycle of our products is long and
unpredictable and requires both a significant capital investment decision by our
customers and a long consultative sales process regarding the use and benefits
of our products and the integration of our products into the customer's current
system. Our sales cycle is generally between three and nine months. A successful
16
sales cycle typically includes presentations to both business and technical
decision makers, as well as a 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, which may require substantial
integration of our software with the customer's existing system. The
implementation of our products involves a significant commitment of resources by
prospective customers. Accordingly, a purchase decision for a potential customer
typically requires the approval of several senior decision makers. Our sales
cycle is affected by the business conditions of each prospective customer, as
well as the overall economic climate for technology-related capital
expenditures. Because a substantial portion of our costs are relatively fixed
and based on anticipated revenues, a failure to book an expected order in a
given quarter would not be offset by a corresponding reduction in costs and
could adversely affect our operating results.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. In addition, the identity of
several of our top five customers has changed from period to period, including
year to year.
PERIOD % OF TOTAL REVENUES IDENTITY AND % OF
OF TOP 5 CUSTOMERS OF TOP 2 CUSTOMERS TOTAL REVENUES
Quarter ended March 31, 2004 47% JP Morgan Chase.......14%
Motorola...............9
Quarter ended March 31, 2003 52 Adobe Systems.........23
JP Morgan Chase.......10
If we lose a significant customer, or fail to increase product sales to an
existing customer as planned, we may not be able to replace the lost revenues
with sales to other customers. In addition, because our marketing strategy is to
concentrate on selling products to industry leaders, any loss of a customer
could harm our reputation within the industry and make it harder for us to sell
our products to other companies in that industry. The loss of, or a reduction in
sales to, one or more significant customers would likely result in a decrease in
our revenues. In addition, because a substantial portion of our revenues result
from product sales to a limited number of customers, the identity of which
change from quarter to quarter, in any given quarter the percentage contribution
of POWERTIER, EDGEXTEND and DIRECTALERT to total license revenues varies,
sometimes dramatically.
DECLINES IN SALES REVENUE MAY RESTRICT OUR GROWTH AND HARM OUR BUSINESS AND OUR
ABILITY TO ACHIEVE OUR FINANCIAL OBJECTIVES.
We have experienced substantial sales declines beginning in 2001. In 2001
our revenues declined from the previous year by 23%, in 2002 our revenues
declined by 25% and in 2003 our revenues declined by 36%. We believe a
substantial portion of the decline in sales of our products is due to the
general downturn in information technology spending by our prospective
customers. Our target customers are those data- and transaction-intensive
companies that are either building a new project or re-architecting their
current system in order to improve their data management performance. Thus,
anything that would cause these target customers to defer these projects, such
as constrained budgets, will negatively affect our product sales. Our declining
sales may also negatively affect our reputation with the investment community,
which may lead to a decline in our stock price and may also discourage investors
from purchasing our stock.
WE ARE CURRENTLY TARGETING THAT A MATERIAL PORTION OF OUR REVENUES WILL BE
DERIVED FROM SALES OF OUR NEWEST PRODUCT, EDGEXTEND; HOWEVER, THERE ARE
TECHNICAL AND MARKET RISKS ASSOCIATED WITH NEW PRODUCTS.
Sales of our EDGEXTEND products currently represent a material percentage of
our revenues. New products, like EDGEXTEND, often contain errors or defects,
particularly when first introduced. Any errors or defects could be serious or
difficult to correct and could result in a delay of product release or adoption
resulting in lost revenues or a delay in gaining market share, which could harm
our revenues and reputation. In addition, market adoption is often slower for
newer products, like EDGEXTEND, than for existing products. Because we are
focusing our marketing and sales efforts on our newer EDGEXTEND data services
product, any failure in market adoption of this product could result in our
failure to meet our revenue goals.
17
BECAUSE OUR PRODUCTS PROVIDE ADDITIONAL FEATURES TO SUCCESSFUL APPLICATION
SERVER PRODUCTS FROM IBM AND BEA, THEY MAY ADD THESE FEATURES TO A FUTURE
VERSION OF THEIR PRODUCT, REDUCING THE NEED FOR OUR PRODUCTS.
Because IBM and BEA control the development schedule and feature set of
their products, we need to maintain a good working relationship with IBM and BEA
if we decide to develop future versions of EDGEXTEND for those new versions of
WebSphere and WebLogic. Failure to develop future versions compatible with the
latest versions from IBM and BEA could greatly reduce market acceptance for our
products. IBM or BEA could add features to their products, which would reduce or
eliminate the need for our products, which could harm our business. They could
develop their products in a more proprietary way to favor their own products, or
those offered by a third party, which could make it much harder for us to
compete in the J2EE software market.
IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS
AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS.
The market for our products and services is characterized by rapid
technological change, dynamic customer demands and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovation in software applications and hardware
configurations and the emergence or adoption of new industry standards,
including Internet technology standards. We may need to increase our research
and development investment over our current targeted spending levels to maintain
our technological leadership. Our future success depends on our ability to
continue to enhance our current products and to continue to develop and
introduce new products that keep pace with competitive product introductions and
technological developments. For example, as Sun Microsystems introduces new J2EE
specifications, we may need to introduce new versions of EDGEXTEND designed to
support these new specifications to remain competitive. If IBM or BEA introduce
new versions of WebSphere and WebLogic, we may need to introduce new versions of
EDGEXTEND designed to support these new versions. If we do not bring
enhancements and new versions of our products to market in a timely manner, our
market share and revenues could decrease and our reputation could suffer. If we
fail to anticipate or respond adequately to changes in technology and customer
needs, or if there are any significant delays in product development or
introduction, our revenues and business could suffer.
Our EDGEXTEND for WebSphere product was released in March 2002, our
EDGEXTEND for WebLogic product was released in August 2002, our EDGEXTEND for
..NET product was released in October 2002 and our EDGEXTEND for Linux was
released in March 2003. Any delays in releasing future enhancements to these
products or new products on a generally available basis may materially effect
our future revenues.
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO MAINTAIN AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES.
We must maintain a strong direct sales team to generate revenues. In the
last several years, we have experienced significant turnover in our sales team.
Typically, newly hired employees have required training and approximately six to
nine months experience to achieve full productivity. Like many companies in the
software industry, we are likely to continue to experience turnover in our sales
force and we may not be able to hire enough qualified individuals in the future.
In addition, in connection with our workforce reductions in the third and fourth
quarters of 2003, we reduced our sales and marketing staff from 22 employees at
the beginning of 2003 to 14 employees as of March 31, 2004. As a result of our
employee turnover and headcount reductions, we may not meet our sales goals.
BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM
DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES.
Because our products are often incorporated into multi-million dollar
enterprise projects, we depend on the successful and timely completion of these
large projects to fully deploy our products and achieve our revenue goals. These
enterprise projects often take many years to complete and can be delayed by a
variety of factors, including general or industry-specific economic downturns,
our customers' budget constraints, other customer-specific delays, problems with
other system components or delays caused by the OEM, independent software
vendors, system integrators or other third-party partners who may be managing
the system deployment. If our customers cannot successfully implement
large-scale deployments, or they determine for any reason that our products
cannot accommodate large-scale deployments or that our products are not
appropriate for widespread use, our business could suffer. In addition, if an
OEM, independent software vendors, system integrator or other third-party
partner fails to complete a project utilizing our product for a customer in a
timely manner, our revenues or business reputation could suffer.
18
BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE J2EE APPLICATION
SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR
THEIR OWN PRODUCTS.
Because Sun Microsystems controls the J2EE standard, we need to maintain a
good working relationship with Sun Microsystems as we decide to develop future
versions of EDGEXTEND, as well as additional products using J2EE, that will gain
market acceptance. In March 1998, we entered into a license agreement with Sun
Microsystems, pursuant to which we granted Sun Microsystems rights to
manufacture and sell, by itself and not jointly with others, products under a
number of our patents, and Sun Microsystems granted us rights to manufacture and
sell, by ourselves and not jointly with others, products under a number of Sun
Microsystems' patents. As a result, Sun Microsystems may develop and sell some
competing products that would, in the absence of this license agreement,
infringe our patents. Because Sun Microsystems controls the J2EE standard, it
could develop the J2EE standard in a more proprietary way to favor a product
offered by its own products, or a third party, which could make it much harder
for us to compete in the J2EE software market.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE
HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The markets for our products are intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our markets are:
o performance, including scalability, integrity and availability;
o ability to provide a competitive return on investment to the customer;
o flexibility;
o use of standards-based technology (e.g. J2EE);
o ease of integration with customers' existing enterprise systems;
o ease and speed of implementation;
o quality of support and service;
o security;
o company reputation and perception of viability; and
o price.
In the EDGEXTEND market, alternative technology is available from a variety
of sources. Companies such as Versant, Gemstone and Progress Software are
middleware vendors that offer alternative data management solutions that
directly target EDGEXTEND'S market. In addition, many prospective customers may
build their own custom solutions.
In the DIRECTALERT market, alternative approaches are provided by a variety
of sources, including the potential for internal development. Company vendors
such as SpiritSoft, TIBCO, and IBM provide message-oriented middleware software,
which may evolve into competitive products. Vendors such as webMethods and
Business Objects provide alternative architectures for business intelligence
information. DIRECTALERT is based on licensed technology, which the Company is
licensed to distribute on a non-exclusive basis.
In the POWERTIER market, our competitors include both publicly and
privately-held enterprises, including BEA Systems (WebLogic), IBM (WebSphere),
Oracle (OAS) and Sun Microsystems (Sun ONE Application Server). Many customers
may not be willing to purchase our POWERTIER products because they have already
invested heavily in databases and other enterprise software components offered
by these competing companies. Many of these competitors have pre-existing
customer relationships, longer operating histories, greater financial,
technical, marketing and other resources, greater name recognition and larger
installed bases of customers than we do.
19
IF THE MARKETS FOR INFRASTRUCTURE SOFTWARE FOR NETWORKS AND WEB-BASED PRODUCTS
AND SERVICES DO NOT DEVELOP AS WE CURRENTLY ENVISION, WE MAY NOT BE ABLE TO
ACHIEVE OUR PLANNED REVENUE TARGETS.
Our performance and future success will depend on the growth and widespread
adoption of the markets for infrastructure software for networks and web-based
products and services. If these markets do not develop in the manner we
currently envision, our business could be harmed. Moreover, critical issues
concerning the commercial use of the Internet, including security, cost,
accessibility and quality of network service, remain unresolved and may
negatively affect the growth of the Internet as a platform for conducting
various forms of electronic commerce. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols to handle increased activity or due to increased government
regulation.
OUR FAILURE TO MANAGE OUR RESOURCES COULD RESULT IN OUR FAILURE TO ACHIEVE OUR
FINANCIAL OBJECTIVES.
Achieving our planned revenue targets and other financial objectives will
place significant demands on our management and other resources, in particularly
because we must achieve our revenue and product development goals using both
fewer people and a constrained budget. Our ability to manage our resources
effectively will require us to continue to improve our sales process and to
train, motivate and manage our employees. If we are unable to manage our
business effectively within our current budget, we may not be able to retain key
personnel and the quality of our services and products may suffer.
OUR SALES AND DEVELOPMENT EFFORTS COULD SUFFER IF WE CANNOT ATTRACT AND RETAIN
THE SERVICES OF KEY EMPLOYEES.
Our future success depends on the ability of our management to operate
effectively, both individually and as a group. We are substantially dependent
upon the continued service of our existing executive personnel, especially
Christopher T. Keene, our Chief Executive Officer. We do not have a key person
life insurance policy covering Mr. Keene or any other officer or key employee.
Our success will depend in large part upon our ability to attract and retain
highly-skilled employees, particularly sales personnel and software engineers.
If we are not successful in attracting and retaining these skilled employees,
our sales and product development efforts would suffer. In addition, if one or
more of our key employees resigns to join a competitor or to form a competing
company, the loss of that employee and any resulting loss of existing or
potential customers to a competitor could harm our business. If we lose any key
personnel, we may not be able to prevent the unauthorized disclosure or use of
our technical knowledge or other trade secrets by those former employees.
OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR
SOFTWARE MAY BE DELAYED.
Complex software products often contain errors or defects, particularly when
first introduced or when new versions or enhancements are released. Our products
have in the past contained and may in the future contain errors and defects,
which may be serious or difficult to correct and which may cause delays in
subsequent product releases. Delays in shipment of scheduled software releases
or serious defects or errors could result in lost revenues or a delay in market
acceptance, which could have a material adverse effect on our revenues and
reputation.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS.
Because our customers use our products for important business applications,
errors, defects or other performance problems could result in financial or other
damages to our customers. They could pursue claims for damages, which, if
successful, could result in our having to make substantial payments. Although
our purchase agreements typically contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions. A
product liability claim brought against us, even if meritless, would likely be
time consuming and costly for us to litigate or settle.
20
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. Revenues from licenses and services to
customers outside the United States were:
THREE MONTHS ENDED MARCH 31, REVENUES % OF TOTAL REVENUES
---------------------------- -------- -------------------
2004 $811,000 39%
2003 1.6 million 64
YEAR ENDED DECEMBER 31, REVENUES % OF TOTAL REVENUES
----------------------- -------- -------------------
2003 $3.8 million 40%
2002 4.8 million 33
We expect international revenues to continue to represent a significant
portion of our total revenues. To date, almost all of our international revenues
have resulted from our direct sales efforts. In international markets, however,
we expect that we will depend more heavily on third party distributors to sell
our products in the future. The success of our international strategy will
depend on our ability to develop and maintain productive relationships with
these third parties. The failure to develop key international markets for our
products could cause a reduction in our revenues. Additional risks related to
our international expansion and operation include:
o difficulties of staffing, funding and managing foreign operations;
o future dependence on the sales efforts of our third party distributors
to expand business;
o longer payment cycles typically associated with international sales;
o tariffs and other trade barriers;
o failure to comply with a wide variety of complex foreign laws and
changing regulations;
o exposure to political instability, acts of war, terrorism and economic
downturns;
o failure to localize our products for foreign markets;
o restrictions under U.S. law on the export of technologies;
o potentially adverse tax consequences;
o reduced protection of intellectual property rights in some countries;
and
o currency fluctuations.
The majority of our product sales outside the United States are denominated
in U.S. dollars. We do not currently engage in any hedging transactions to
reduce our exposure to currency fluctuations as a result of our foreign
operations. We are not currently ISO 9000 compliant, nor are we attempting to
meet all foreign technical standards that may apply to our products. Our failure
to develop our international sales channel as planned could cause a decline in
our revenues.
21
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION
MAY BE IMPAIRED.
Our success depends on our ability to protect our proprietary rights to the
technologies used in our products, and yet the measures we are taking to protect
these rights may not be adequate. If we are not adequately protected, our
competitors could use the intellectual property that we have developed to
enhance their products and services, which could harm our business. We rely on a
combination of patents, copyright and trademark laws, trade secrets,
confidentiality provisions and other contractual provisions to protect our
proprietary technology, but these legal means afford only limited protection.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. In addition, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States. Litigation may be necessary to
enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
WE MAY BE SUED FOR PATENT INFRINGEMENT, WHICH COULD BE TIME CONSUMING AND
EXPENSIVE, AND, IF SUCCESSFUL, COULD REQUIRE US TO CEASE SELLING OR MATERIALLY
CHANGE OUR PRODUCTS.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. As the number of entrants
into our market increases, the possibility of an intellectual property claim
against us grows. For example, we may be inadvertently infringing a patent of
which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our current stockholders sell substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
the market price of our common stock could fall. As of March 31, 2004, we had
approximately 2,715,918 shares of common stock outstanding. Virtually all of our
shares, other than shares held by affiliates, are freely tradable. Shares held
by affiliates are tradable, subject to volume and other restrictions of Rule
144. These sales of common stock could impede our ability to raise funds at an
advantageous price, or at all, through the sale of securities.
IF OUR STOCKHOLDERS' EQUITY FALLS BELOW $2.5 MILLION, OUR STOCK COULD BE
DELISTED FROM NASDAQ SMALLCAP MARKET.
Our stockholders' equity as of March 31, 2004 was $3.1 million, which is in
excess of the $2.5 million minimum stockholders' equity requirement for listing
on the Nasdaq SmallCap Market. However, if we do not achieve our target
revenues, we may incur additional net losses, which would result in a decrease
in our stockholders' equity. If our stockholders' equity falls below $2.5
million, our stock could be subject to delisting by Nasdaq, in which case our
stock would trade on the OTC "bulletin board." Delisting of our stock from the
Nasdaq SmallCap Market could reduce the liquidity in the market for our stock
and negatively impact our reputation and consequently our business.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
Our common stock price has been and may continue to be highly volatile, and
we expect that the market price of our common stock will continue to be subject
to significant fluctuations, as a result of variations in our quarterly
operating results and the overall volatility of the Nasdaq SmallCap Market.
These fluctuations have been, and may continue to be, exaggerated because an
active trading market has not developed for our stock. Thus, investors may have
difficulty selling shares of our common stock at a desirable price, or at all.
22
In addition, the market price of our common stock may rise or fall in the
future as a result of many factors, such as:
o variations in our quarterly results;
o announcements of technology innovations by us or our competitors;
o introductions of new products by us or our competitors;
o acquisitions or strategic alliances by us or our competitors;
o hiring or departure of key personnel;
o the gain or loss of a significant customer or order;
o changes in estimates of our financial performance or changes in
recommendations by securities analysts;
o market conditions and expectations regarding capital spending in the
software industry and in our customers' industries; and
o adoption of new accounting standards affecting the software industry.
The market prices of the common stock of many companies in the software and
Internet industries have experienced extreme price and volume fluctuations,
which have often been unrelated to these companies' operating performance. In
the past, securities class action litigation has often been brought against a
company after a period of volatility in the market price of its stock. We may in
the future be a target of similar litigation. Securities litigation could result
in substantial costs and divert management's attention and resources, which
could harm our business.
IF WE DEFAULT ON OUR BANK COVENANTS, THE BANK MAY, AMONG OTHER THINGS, CEASE
ADVANCING FUNDS, DEMAND IMMEDIATE REPAYMENT AND EXERCISE ALL OTHER RIGHTS AS A
CREDITOR UNDER OUR AGREEMENTS.
We were in compliance with the covenants in our loan agreement with
Comerica Bank at March 31, 2004, however, we have not been able to comply with
the covenants of our loan agreement in the past, and we may not be able to be in
compliance with our financial covenants in our loan agreement in the future if
we fail to meet our revenue targets or continue to have net losses. On April 30,
2004, we renewed our loan agreement with the bank and we revised our covenant
structure. This new structure requires us, among other things, to maintain
certain working capital and profitability covenants. We expect to meet these
covenants if we are able to achieve our target revenues. Borrowings under the
facility are collateralized by substantially all of our assets. If we violate
any covenant in our agreements with Comerica Bank, the bank may declare us in
default of our obligations and could, among other things, refuse to advance us
any additional funds under the line of credit, accelerate our repayment
obligations under all our facilities, and exercise all of its other rights as a
creditor under our facilities, including the sale of our assets, including our
intellectual property.
THE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER THAT CERTAIN OF OUR STOCKHOLDERS MAY CONSIDER
DESIRABLE.
Provisions in our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
o establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
o authorizing the board to issue preferred stock;
o prohibiting cumulative voting in the election of directors;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent; and
o establishing advance notice requirements for nominations for election
of the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
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ITEM 3. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on our
management's evaluation (with the participation of our principal executive
officer and principal financial officer) as of the end of the period covered by
this Quarterly Report on Form 10-QSB, our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) are effective to ensure that information
required to be disclosed by us in reports that we file, or submit, under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms.
(b) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no
change in our internal control over financial reporting during the three months
ended March 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Internal control over financial reporting consists of control processes
designed to provide assurance regarding the reliability of financial reporting
and the preparation of our financial statements in accordance with GAAP. To the
extent that components of our internal control over financial reporting are
included in our disclosure controls, they are included in the scope of the
evaluation by our chief executive officer and chief financial officer referenced
above.
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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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
10.31 Amendment No. 3 to Amended and Restated Loan and Security
Agreement Between Persistence Software, Inc. and Comerica Bank
dated April 30, 2004.
31.1 Certificate of Chief Executive Officer, pursuant to Rule
13a-14(a).
31.2 Certificate of Chief Financial Officer, pursuant to Rule
13a-14(a).
32.1 Certificate of Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350.
32.2 Certificate of Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350.
(b) REPORTS ON FORM 8-K:
Reports on Form 8-K. Two reports on Form 8-K were filed during the quarter
ended March 31, 2004: one report on From 8-K was filed on January 29, 2004,
reporting matters under Items 7 (Financial Statements, Pro Forma Financial
Information and Exhibits) and 9 (Regulation FD Disclosure) and included
financial statements for the three months and year ended December 31, 2003, and
one report on Form 8-K was filed on February 10, 2004, reporting matters under
Items 5 (Other Events and Required FD Disclosure) and 7 (Financial Statements,
Pro Forma Financial Information and Exhibits).
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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/ BRIAN TOBIN
--------------------------------
BRIAN TOBIN
ACTING CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: May 14, 2004
26
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
10.31 Amendment No. 3 to Amended and Restated Loan and Security
Agreement Between Persistence Software, Inc. and Comerica Bank
dated April 30, 2004.
31.1 Certificate of Chief Executive Officer, pursuant to Rule
13a-14(a).
31.2 Certificate of Chief Financial Officer, pursuant to Rule
13a-14(a).
32.1 Certificate of Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350.
32.2 Certificate of Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350.