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 JUNE 30, 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 July 31, 2004, there were 2,718,664 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 JUNE 30, 2004 AND
DECEMBER 31, 2003.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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)
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 4,987 $ 5,680
Accounts receivable, net 1,044 1,498
Prepaid expenses and other current assets 390 258
----------- -----------
Total current assets 6,421 7,436
Property and equipment, net 105 95
Purchased intangibles, net 41 59
Other assets 37 37
----------- -----------
Total assets $ 6,604 $ 7,627
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 353 $ 329
Accrued compensation and related benefits 418 338
Other accrued liabilities 586 924
Deferred revenues net of long-term portion 2,002 2,565
Current portion of long-term obligations 5 334
----------- -----------
Total current liabilities 3,364 4,490
Long-term liabilities:
Long-term portion of deferred revenues -- 84
Long-term obligations 10 18
----------- -----------
Total long-term liabilities 10 102
----------- -----------
Total liabilities 3,374 4,592
----------- -----------
Stockholders' equity:
Common stock 67,129 67,112
Accumulated deficit (63,891) (64,076)
Accumulated other comprehensive loss (8) (1)
----------- -----------
Total stockholders' equity 3,230 3,035
----------- -----------
Total liabilities and stockholders' equity $ 6,604 $ 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 SIX MONTHS ENDED
----------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
--------------------------------------------------
Revenues:
Licenses $ 1,139 $ 1,656 $ 1,982 $ 2,950
Service 1,182 1,220 2,396 2,449
-------- -------- -------- --------
Total revenues 2,321 2,876 4,378 5,399
-------- -------- -------- --------
Cost of revenues:
Licenses 23 22 42 61
Service 317 459 583 936
-------- -------- -------- --------
Total cost of revenues 340 481 625 997
-------- -------- -------- --------
Gross profit 1,981 2,395 3,753 4,402
-------- -------- -------- --------
Operating expenses:
Sales and marketing 755 1,545 1,537 3,076
Research and development 622 803 1,193 1,652
General and administrative 470 657 944 1,300
Purchased intangibles -- -- (110) --
-------- -------- -------- --------
Total operating expenses 1,847 3,005 3,564 6,028
-------- -------- -------- --------
Income/(loss) from operations 134 (610) 189 (1,626)
Interest income 8 16 17 35
Interest and other expense (4) (11) (11) (22)
-------- -------- -------- --------
Income/(loss) before income taxes 138 (605) 195 (1,613)
Income taxes (9) (19) (9) (19)
-------- -------- -------- --------
Net income/(loss) $ 129 $ (624) $ 186 $(1,632)
======== ======== ======== ========
Basic net income/(loss) per share $ 0.05 $ (0.26) $ 0.07 $ (0.68)
======== ======== ======== ========
Diluted net income/(loss) per share $ 0.05 $ (0.26) $ 0.07 $ (0.68)
======== ======== ======== ========
Shares used in calculating basic net
income/(loss) per share 2,716 2,406 2,715 2,404
======== ======== ======== ========
Shares used in calculating diluted net
income/(loss) per share 2,743 2,406 2,741 2,404
======== ======== ======== ========
See notes to condensed consolidated financial statements.
4
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
----------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 186 $(1,632)
Adjustments to reconcile net income/(loss) to net cash used in
operating activities:
Depreciation and amortization 49 237
Amortization of deferred stock compensation -- 8
Release of obligation incurred to acquire purchased intangibles (110) --
Loss on sale of fixed assets 5 --
Other non-cash items (5) (4)
Changes in operating assets and liabilities:
Accounts receivable, net 454 (696)
Prepaid expenses and other current assets (132) 170
Accounts payable 24 87
Accrued compensation and related benefits 80 26
Other accrued liabilities (338) (100)
Deferred revenues (647) (590)
-------- --------
Net cash used in operating activities (434) (2,494)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (47) (24)
Proceeds from sale of property and equipment -- 2
-------- --------
Net cash used in investing activities (47) (22)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of offering costs 17 (20)
Repayment of obligations incurred to acquire purchased intangibles (160) --
Repayment of long term obligations (62) (180)
-------- --------
Net cash used in financing activities (205) (200)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (7) (13)
-------- --------
CASH AND CASH EQUIVALENTS:
Net decrease (693) (2,729)
Beginning of period 5,680 8,903
-------- --------
End of period $ 4,987 $ 6,174
======== ========
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 June 30, 2004 and for the three and six month periods ended
June 30, 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 June 30, 2004, its condensed consolidated
results of operations for the three and six month periods ended June 30, 2004
and 2003, and its condensed consolidated cash flows for the six month periods
ended June 30, 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 income per common share for the three and six months
ended June 30, 2004 was the same as basic net income per common share.
Diluted per share amounts are calculated using the weighted-average number
of common shares outstanding during the period and, when dilutive, the
weighted-average number of potential common shares from the exercise of
outstanding options and warrants to purchase common stock using the treasury
stock method. A reconciliation of the numerators and denominators used in the
basic and diluted net income (loss) per share amounts follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ -----------
Numerator for basic and diluted net income (loss) per share -
net income/(loss)......................................... $ 129 $ (624) $ 186 $ (1,632)
------------ ------------ ------------ -----------
Denominator for basic net income (loss) per share -
weighted-average shares outstanding....................... 2,716 2,406 2,715 2,404
Dilutive effect of:
Common stock options........................................... 27 -- 26 --
Warrants....................................................... -- -- -- --
------------ ------------ ------------ -----------
Denominator for diluted net income (loss) per share............ 2,743 2,406 2,741 2,404
============ ============ ============ ===========
6
As of June 30, 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):
JUNE 30, JUNE 30,
2004 2003
------ ------
Outstanding options 366 426
Warrants 224 134
------ ------
Total 590 560
====== ======
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 No. 148 ACCOUNTING
FOR STOCK-BASED COMPENSATION, TRANSITION AND DISCLOSURE, requires the disclosure
of pro forma net income/(loss) as if the Company had adopted the fair value
method. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ---------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ---------------
Risk Free Interest Rate.................................. 2.71% 1.81% 2.33% 1.81%
Expected Life after vesting (years) ..................... 2.50 2.50 2.50 2.50
Expected Volatility...................................... 118% 144% 125% 145%
Expected Dividend........................................ $0 $0 $0 $0
The Company's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of the
awards granted had been amortized to expense over the vesting period of the
awards, pro forma net income/(loss) (net of amortization of deferred
compensation expense already recorded for the six months ended June 30, 2003)
would have been approximately as follows (in thousands, except for per share
data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income/(loss) as reported............................ $ 129 $ (624) $ 186 $ (1,632)
Add: Stock-based employee compensation expense
included in reported net income/(loss)............... -- 2 -- 8
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards (120) (139) (259) (256)
---------- ---------- ---------- ----------
Pro forma net income/(loss).............................. $ 9 $ (761) $ (73) $ (1,880)
========== ========== ========== ==========
Basic net income/(loss) per share:
As reported.............................................. $ 0.05 $ (0.26) $ 0.07 $ (0.68)
Pro forma................................................ $ 0.00 $ (0.32) $ (0.03) $ (0.78)
Diluted net income/(loss) per share:
As reported.............................................. $ 0.05 $ (0.26) $ 0.07 $ (0.68)
Pro forma................................................ $ 0.00 $ (0.32) $ (0.03) $ (0.78)
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 for consultants 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):
SIX MONTHS ENDED JUNE 30,
2004 2003
----------- -----------
Net income/(loss)............................... $ 186 $ (1,632)
Other comprehensive income/(loss) .............. (7) (13)
----------- -----------
Total comprehensive income/(loss)............... $ 179 $ (1,645)
=========== ===========
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 June 30, 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 June 30, 2004. As
a result, the Company believes the estimated fair value of these indemnification
provisions is minimal.
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 and 2002, 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. We cannot
provide any assurance that these pressures on IT spending will ease. Continued
competitive pressure and a weak economy could have a continuing pronounced
effect on our operating results. We undertook a variety of cost reduction
measures during the third and fourth quarters of 2003 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 $4.4 million for the six months ended June 30, 2004 and $5.4
million for the six months ended June 30, 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. Our deferred revenue balance, which is comprised mainly of our
support and maintenance contracts, was $2.0 million at June 30, 2004. This
represents a 24% decrease from our deferred revenue balance of $2.6 million at
December 31, 2003. This decrease was primarily due to three customers who chose
not to renew their support and maintenance contracts. Our deferred revenue
balance may fluctuate if existing customers choose not to renew their support
and maintenance contracts or new or existing customers purchase such contracts.
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 JUNE 30, REVENUES % OF TOTAL REVENUES
--------------------------- -------- -------------------
2004 $ 1.4 million 59%
2003 614,000 21
SIX MONTHS ENDED JUNE 30, REVENUES % OF TOTAL REVENUES
------------------------- -------- -------------------
2004 $ 2.2 million 50%
2003 2.2 million 41
Sales of our products to customers in Europe increased by 121% in the three
months ended June 30, 2004 as compared to the three months ended June 30, 2003.
This increase was primarily attributable to two customers. Sales of our products
to customers in Europe were flat in the six months ended June 30, 2004 as
compared to the six months ended June 30, 2003.
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 JUNE 30, % OF TOTAL REVENUES
--------------------------- -------------------
2004 64%
2003 69
SIX MONTHS ENDED JUNE 30, % OF TOTAL REVENUES
------------------------- -------------------
2004 50%
2003 58
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 39 total employees as of June 30, 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 June 30, 2004, had an accumulated deficit of $63.9
million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our condensed 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 and the reported amount of
revenues and expenses that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
10
REVENUE RECOGNITION. We recognize revenues in accordance with the American
Institute of Certified Public Accounts' Statement of Position 97-2, "Software
Revenue Recognition," as amended. Future implementation guidance relating to
these standards or any future standards may result in unanticipated changes in
our revenue recognition practices, and these changes could affect our future
revenues and earnings.
Our revenue recognition policy is significant because our revenue is the key
component of our results of operations. In addition, our revenue recognition
determines the timing of certain expenses, such as commissions. We follow
specific and detailed guidelines in measuring and recognizing revenue. We
recognize license revenues upon shipment of the software if collection of the
resulting receivable is probable, an agreement has been executed, the fee is
fixed or determinable and vendor-specific objective evidence exists to allocate
a portion of the total fee to any undelivered elements of the arrangement.
Undelivered elements in these arrangements typically consist of services. For
sales made through distributors, revenue is recognized upon shipment.
Distributors have no right of return. Royalty revenues are recognized when the
software or services has been delivered, collection is reasonably assured and
the fees are determinable. We recognize revenues from customer training, support
and professional services as the services are performed. We generally recognize
support revenues ratably over the term of the support contract. If support or
professional services are included in an arrangement that includes a license
agreement, amounts related to support or professional services are allocated
based on vendor-specific objective evidence. Vendor-specific objective evidence
for support and professional services is based on the price at which such
elements are sold separately, or, when not sold separately, the price
established by management having the relevant authority to make such decision.
While more infrequent, arrangements that require significant modification or
customization of software are recognized under the completion of contract
method.
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 June 30, 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 BASED 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 fair value method 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 condensed 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
THREE MONTHS (SECOND QUARTERS) ENDED JUNE 30, 2004 AND 2003
The following table sets forth statements of operations data for the three
months ended June 30, expressed as a percentage of total revenues:
THREE MONTHS ENDED JUNE 30,
---------------------------
2004 2003
----------- -----------
Revenues:
License.......................................... 49% 58%
Service.......................................... 51 42
----------- -----------
Total revenues............................... 100% 100%
----------- -----------
Cost of revenues:
License.......................................... 1% 1%
Service.......................................... 14 16
----------- -----------
Total cost of revenues....................... 15% 17%
----------- -----------
Gross profit....................................... 85% 83%
Operating expenses:
Sales and marketing.............................. 33% 54%
Research and development......................... 27 28
General and administrative....................... 20 23
----------- -----------
Total operating expenses..................... 80% 105%
----------- -----------
Income/(loss) from operations...................... 5 (22)
Interest income.................................... 0 1
Interest and other expense......................... (0) (0)
----------- -----------
Income/(loss) before income taxes.................. 5 (21)
Income taxes....................................... (0) (1)
----------- -----------
Net income/(loss).................................. 5% (22)%
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
REVENUES
(TABLE $ IN THOUSANDS)
% CHANGE
2004 2003 - 2004 2003
--------- ----------- ---------
Revenues:
License....................... $ 1,139 (31)% $ 1,656
Service....................... 1,182 (3) 1,220
--------- ------ ---------
Total Revenues.............. $ 2,321 (19)% $ 2,876
========= =========
Our total revenues declined by 19% in the three months ended June 30, 2004
as compared to the same period in 2003. For the three months ended June 30,
2004, sales to Nokia accounted for 23% of total revenues, sales to Reuters
Financial accounted for 17% of total revenues, sales to Motorola accounted for
13% of total revenues, and sales to our top five customers accounted for 64% of
total revenues. For the three months ended June 30, 2003, sales to Citigroup
Global Markets accounted for 52% of total revenues, and sales to our top five
customers accounted for 69% 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 31% to $1.1 million in the three months ended June 30, 2004 as
compared to $1.7 million in the three months ended June 30, 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 to 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 June 30, 2004 and the three
months ended June 30, 2003.
INTERNATIONAL REVENUES. International revenues were $1.4 million for the
three months ended June 30, 2004 and $614,000 for the three months ended June
30, 2003, representing an increase of 121%. The increase in international
revenues from the second quarter of 2003 to the second quarter of 2004 was
primarily attributable to increased sales of our software to two customers.
COST OF REVENUES
(TABLE $ IN THOUSANDS)
% CHANGE
2004 2003 - 2004 2003
------- ----------- -------
License ................... $ 23 5% $ 22
Service ................... 317 (31) 459
------- ------- -------
Total cost of revenues... $ 340 (29)% $ 481
------- -------
Gross profit .............. $1,981 (17)% $2,395
======= =======
COST OF LICENSE REVENUES. Cost of license revenues consists of royalties,
packaging, documentation and associated shipping costs, commissions paid to
distributors of our software, 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 and commission payments to distributors.
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 and commissions paid to distributors. The 31%
decrease in cost of services revenues from the three months ended June 30, 2003
to the three months ended June 30, 2004 was primarily due to a $159,000
reduction in staffing and personnel related costs. As a percentage of service
revenues, cost of service revenues was 27% for the three months ended June 30,
2004 and 38% for the three months ended June 30, 2003.
OPERATING EXPENSES
(TABLE $ IN THOUSANDS)
% CHANGE
2004 2003 - 2004 2003
-------- ----------- --------
Sales and marketing ........... $ 755 (51)% $ 1,545
Research and development ...... 622 (23) 803
General and administrative..... 470 (28) 657
-------- -------- --------
Total operating expenses .... $ 1,847 (39)% $ 3,005
======== ========
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 51% decrease in sales
and marketing expenses from the three months ended June 30, 2003 to the three
months ended June 30, 2004 was primarily due to a $477,000 reduction in staffing
and personnel related costs, a $150,000 reduction in marketing and promotional
expenses, as well as a decrease of $119,000 in commissions expensed due to lower
revenues. Sales and marketing expenses represented 33% of total revenues for the
three months ended June 30, 2004 and 54% of total revenues for the three months
ended June 30, 2003. We are presently targeting that fiscal 2004 sales and
marketing expense levels will be lower than comparable fiscal 2003 expense
levels because as of July 2004 we had 14 sales and marketing employees as
compared to an average of 22 such employees during 2003.
13
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
23% decrease in research and development expenses from the three months ended
June 30, 2003 to the three months ended June 30, 2004 was primarily due to a
$158,000 reduction in staffing and personnel related costs. Research and
development expenses represented 27% of total revenues for the three months
ended June 30, 2004 and 28% of total revenues for the three months ended June
30, 2003. We are presently targeting that fiscal 2004 research and development
expense levels will be lower than comparable fiscal 2003 expense levels because
as of July 2004 we had 17 research and development employees as compared to an
average of 22 such employees during 2003.
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
28% decrease in general and administrative expenses from the three months ended
June 30, 2003 to the three months ended June 30, 2004 was primarily due to a
$99,000 reduction in staffing and personnel related costs. General and
administrative expenses represented 20% of total revenues for the three months
ended June 30, 2004 and 23% of total revenues for the three months ended June
30, 2003.
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 was $4,000 for the
three months ended June 30, 2004 and $5,000 for the three months ended June 30,
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 June 30, 2004 and $23,000 as of June 30, 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 $2,000 for the three months ended June 30, 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.
14
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
The following table sets forth statements of operations data for the six months
ended June 30, expressed as a percentage of total revenues:
SIX MONTHS ENDED JUNE 30,
2004 2003
----------- -----------
Revenues:
License......................................... 45% 55%
Service......................................... 55 45
----------- -----------
Total revenues.............................. 100% 100%
----------- -----------
Cost of revenues:
License......................................... 1% 1%
Service......................................... 13 17
----------- -----------
Total cost of revenues...................... 14% 18%
----------- -----------
Gross profit...................................... 86% 82%
Operating expenses:
Sales and marketing............................. 35% 57%
Research and development........................ 27 31
General and administrative...................... 22 24
Purchased intangibles........................... (3) --
----------- -----------
Total operating expenses.................... 81% 112%
----------- -----------
Income/(loss) from operations..................... 5 (30)
Interest income................................... 0 0
Interest and other expense........................ (0) (0)
----------- -----------
Income/(loss) before income taxes................. 5 (30)
Income taxes...................................... (0) (0)
----------- -----------
Net income/(loss)................................. 5% (30)%
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
REVENUES
(TABLE $ IN THOUSANDS)
% CHANGE
2004 2003 - 2004 2003
---------- ----------- ----------
Revenues:
License........................ $ 1,982 (33)% $ 2,950
Service........................ 2,396 (2) 2,449
---------- ---- ----------
Total Revenues.............. $ 4,378 (19)% $ 5,399
========== ==========
Our total revenues declined by 19% in the six months ended June 30, 2004 as
compared to the same period in 2003. For the six months ended June 30, 2004,
sales to Nokia accounted for 14% of total revenues, sales to Motorola accounted
for 11% of total revenues, and sales to our top five customers accounted for 50%
of total revenues. For the six months ended June 30, 2003, sales to Citigroup
Global Markets accounted for 30% of total revenues, sales to Adobe Systems
accounted for 14% of total revenues, and sales to our top five customers
accounted for 58% of total revenues.
LICENSE REVENUES. License revenues declined by 33% to $2.0 million in the
six months ended June 30, 2004 as compared to $3.0 million in the six months
ended June 30, 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 to 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.
15
SERVICE REVENUES. Our service revenues were flat at $2.4 million in each of
the six months ended June 30, 2004 and the six months ended June 30, 2003.
INTERNATIONAL REVENUES. International revenues were flat at $2.2 million in
each of the six months ended June 30, 2004 and the six months ended June 30,
2003.
COST OF REVENUES
(TABLE $ IN THOUSANDS)
% CHANGE
2004 2003 - 2004 2003
------ ----------- ------
License ................ $ 42 (31)% $ 61
Service ................ 583 (38) 936
------ ------ ------
Total cost of revenues $ 625 (37)% $ 997
------ ------
Gross profit ........... $3,753 (15)% $4,402
====== ======
COST OF LICENSE REVENUES. Cost of license revenues as a percentage of
license revenues is expected to vary between periods due to royalty charges from
third party software vendors and commission payments to distributors.
COST OF SERVICE REVENUES. The 38% decrease in cost of services revenues from
the six months of fiscal 2003 to the six months of fiscal 2004 was primarily due
to a $372,000 reduction in staffing and personnel related costs. As a percentage
of service revenues, cost of service revenues was 24% for the six months ended
June 30, 2004 and 38% for the six months ended June 30, 2003.
OPERATING EXPENSES
(TABLE $ IN THOUSANDS)
% CHANGE
2004 2003 - 2004 2003
-------- ----------- --------
Sales and marketing ............... $ 1,537 (50)% $ 3,076
Research and development .......... 1,193 (28) 1,652
General and administrative......... 944 (27) 1,300
Purchased intangibles ............. (110) (100) --
-------- -------- --------
Total operating expenses ........ $ 3,564 (41)% $ 6,028
======== ========
SALES AND MARKETING. The 50% decrease in sales and marketing expenses from
the first six months of 2003 to the first six months of 2004 was primarily due
to a $1.1 million reduction in staffing and personnel related costs, a $297,000
reduction in marketing and promotional expenses, as well as a decrease of
$128,000 in commissions expensed due to lower revenues. Sales and marketing
expenses represented 35% of total revenues for the six months ended June 30,
2004 and 57% of total revenues for the six months ended June 30, 2003. We are
presently targeting that fiscal 2004 sales and marketing expense levels will be
lower than comparable fiscal 2003 expense levels because as of July 2004 we had
14 sales and marketing employees as compared to an average of 22 such employees
during 2003.
RESEARCH AND DEVELOPMENT. The 28% decrease in research and development
expenses from the first six months of 2003 to the first six months of 2004 was
primarily due to a $398,000 reduction in staffing and personnel related costs.
Research and development expenses represented 27% of total revenues for the six
months ended June 30, 2004 and 31% of total revenues for the six months ended
June 30, 2003. We are presently targeting that fiscal 2004 research and
development expense levels will be lower than comparable fiscal 2003 expense
levels because as of July 2004 we had 17 research and development employees as
compared to an average of 22 such employees during 2003.
GENERAL AND ADMINISTRATIVE. The 27% decrease in general and administrative
expenses from the first six months of 2003 to the first six months of 2004 was
primarily due to a $193,000 reduction in staffing and personnel related costs as
well as a $218,000 reduction in costs associated with our status as a public
company. General and administrative expenses represented 22% of total revenues
for the six months ended June 30, 2004 and 24% of total revenues for the six
months ended June 30, 2003.
16
PURCHASED INTANGIBLES. Purchased intangibles expense (reversal) was
$(110,000) for the six months ended June 30, 2004. 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 was $6,000 for the six
months ended June 30, 2004 and $13,000 for the six months ended June 30, 2003.
STOCK-BASED COMPENSATION. Certain 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 June 30, 2004 and $23,000 as of June 30, 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 $8,000 for the six months ended June 30, 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 June 30, 2004, we had $5.0 million of cash and cash equivalents as
compared to $5.7 million as of December 31, 2003.
Net cash used in operating activities was $434,000 for the six months ended
June 30, 2004, as compared to $2.5 million for the six months ended June 30,
2003. The main reason for the decrease in net cash used in operating activities
in the first six months of 2004 was an improvement in our net loss position.
Net cash used in investing activities was not significant for the six months
ended June 30, 2004 or for the six months ended June 30, 2003.
Net cash used in financing activities was $205,000 for the six months ended
June 30, 2004, because we renegotiated and paid off a long-term obligation for
third party software. Net cash used in financing activities was $200,000 for the
six months ended June 2003 which consisted mainly of $180,000 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 June 30, 2004. We also had a $149,000 equipment term loan,
which was repaid as of June 30, 2004. As of June 30, 2004 we were in compliance
with our debt covenants, which require us, among other things, to maintain
certain working capital and profitability covenants. We expect to meet these
covenants if we are able to achieve our revenues and accounts receivable
collection targets. Borrowings under the facility are collateralized by
substantially all of our assets.
We are currently targeting that our current cash and cash equivalents will
be sufficient to meet our anticipated cash needs through at least June 30, 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.
17
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; and
o our existing customers may choose not to renew their support and
maintenance contracts.
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 June 30, 2005 provided that we meet our targets with respect to revenues
and accounts receivable collections.
If we experience difficulties in achieving our revenue and accounts
receivable targets, 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.
18
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. 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 Form 10-QSB, 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
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.
19
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 TOTAL REVENUES
------ OF TOP 5 CUSTOMERS OF TOP 2 CUSTOMERS
------------------ ------------------
Six months ended June 30, 2004 50% Nokia.................................14%
Motorola...............................11
Six months ended June 30, 2003 58 Citigroup Global Markets...............30
Adobe Systems..........................14
Year ended December 31, 2003 46 Citigroup Global Markets...............21
Adobe Systems...........................9
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%. In the six months
ended June 30, 2004, our sales revenues declined by 19% from the six months
ended June 30, 2003. We believe a 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 or potential customers, which may lead to a decline in our
stock price and may also discourage investors from purchasing our stock or
potential customers from purchasing our products.
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.
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.
20
IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS
AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS.
The market for our products and services is characterized by rapid
technological change, dynamic customer demands and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovation in software applications and hardware
configurations and the emergence or adoption of new industry standards,
including Internet technology standards. We may need to increase our research
and development investment over our current targeted spending levels to maintain
our technological leadership. Our future success depends on our ability to
continue to enhance our current products and to continue to develop and
introduce new products that keep pace with competitive product introductions and
technological developments. For example, as Sun Microsystems introduces new J2EE
specifications, we may need to introduce new versions of EDGEXTEND designed to
support these new specifications to remain competitive. If IBM or BEA introduce
new versions of WebSphere and WebLogic, we may need to introduce new versions of
EDGEXTEND designed to support these new versions. If we do not bring
enhancements and new versions of our products to market in a timely manner, our
market share and revenues could decrease and our reputation could suffer. If we
fail to anticipate or respond adequately to changes in technology and customer
needs, or if there are any significant delays in product development or
introduction, our revenues and business could suffer.
Our EDGEXTEND for WebSphere product was released in March 2002, our
EDGEXTEND for WebLogic product was released in August 2002, our EDGEXTEND for
..NET product was released in October 2002 and our EDGEXTEND for Linux was
released in March 2003. Any delays in releasing future enhancements to these
products or new products on a generally available basis may materially effect
our future revenues.
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO MAINTAIN AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES.
We must maintain a strong direct sales team to generate revenues. In the
last several years, we have experienced significant turnover in our sales team.
Typically, newly hired employees have required training and approximately six to
nine months experience to achieve full productivity. Like many companies in the
software industry, we are likely to continue to experience turnover in our sales
force and we may not be able to hire enough qualified individuals in the future.
In addition, in connection with our workforce reductions in the third and fourth
quarters of 2003, we reduced our sales and marketing staff from 22 employees at
the beginning of 2003 to 13 employees as of December 31, 2003 and we had 14
sales and marketing employees as of June 30, 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.
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.
21
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.
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.
22
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, 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.
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:
SIX MONTHS ENDED JUNE 30, REVENUES % OF TOTAL REVENUES
------------------------- -------- -------------------
2004 $2.2 million 50%
2003 2.2 million 41
YEAR ENDED DECEMBER 31, REVENUES % OF TOTAL REVENUES
----------------------- -------- -------------------
2003 $3.8 million 40%
2002 4.8 million 33
23
We expect international revenues to continue to represent a significant
portion of our total revenues. To date, almost all of our international revenues
have resulted from our direct sales efforts. In international markets, however,
we expect that we will depend more heavily on third party distributors to sell
our products in the future. The success of our international strategy will
depend on our ability to develop and maintain productive relationships with
these third parties. The failure to develop key international markets for our
products could cause a reduction in our revenues. Additional risks related to
our international expansion and operation include:
o difficulties of staffing, funding and managing foreign operations;
o future dependence on the sales efforts of our third party distributors
to expand business;
o longer payment cycles typically associated with international sales;
o tariffs and other trade barriers;
o failure to comply with a wide variety of complex foreign laws and
changing regulations;
o exposure to political instability, acts of war, terrorism and economic
downturns;
o failure to localize our products for foreign markets;
o restrictions under U.S. law on the export of technologies;
o potentially adverse tax consequences;
o reduced protection of intellectual property rights in some countries;
and
o currency fluctuations.
The majority of our product sales outside the United States are denominated
in U.S. dollars. We do not currently engage in any hedging transactions to
reduce our exposure to currency fluctuations as a result of our foreign
operations. We are not currently ISO 9000 compliant, nor are we attempting to
meet all foreign technical standards that may apply to our products. Our failure
to develop our international sales channel as planned could cause a decline in
our revenues.
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION
MAY BE IMPAIRED.
Our success depends on our ability to protect our proprietary rights to the
technologies used in our products, and yet the measures we are taking to protect
these rights may not be adequate. If we are not adequately protected, our
competitors could use the intellectual property that we have developed to
enhance their products and services, which could harm our business. We rely on a
combination of patents, copyright and trademark laws, trade secrets,
confidentiality provisions and other contractual provisions to protect our
proprietary technology, but these legal means afford only limited protection.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. In addition, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States. Litigation may be necessary to
enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
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.
24
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 June 30, 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 June 30, 2004 was $3.2 million, which is in
excess of the $2.5 million minimum stockholders' equity requirement for listing
on the Nasdaq SmallCap Market. However, if we do not achieve our target
revenues, we may incur additional net losses, which would result in a decrease
in our stockholders' equity. If our stockholders' equity falls below $2.5
million, our stock could be subject to delisting by Nasdaq, in which case our
stock would trade on the OTC "bulletin board." Delisting of our stock from the
Nasdaq SmallCap Market could reduce the liquidity in the market for our stock
and negatively impact our reputation and consequently our business.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE.
Our common stock price has been and may continue to be highly volatile, and
we expect that the market price of our common stock will continue to be subject
to significant fluctuations, as a result of variations in our quarterly
operating results and the overall volatility of the Nasdaq SmallCap Market.
These fluctuations have been, and may continue to be, exaggerated because an
active trading market has not developed for our stock. Thus, investors may have
difficulty selling shares of our common stock at a desirable price, or at all.
In addition, the market price of our common stock may rise or fall in the
future as a result of many factors, such as:
o variations in our quarterly results;
o announcements of technology innovations by us or our competitors;
o introductions of new products by us or our competitors;
o acquisitions or strategic alliances by us or our competitors;
o hiring or departure of key personnel;
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.
25
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 June 30, 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. Our covenant
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.
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 six months
ended June 30, 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 Generally
Accepted Accounting Principles. 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 principal executive officer
and principal financial officer referenced above.
26
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 16, 2004, we held our annual meeting of stockholders for the year
ended December 31, 2003. The following summarizes the matters submitted to a
vote of the stockholders:
1. To amend and restate the Company's Certificate of Incorporation to (i)
decrease the number of authorized shares of Common Stock from 75,000,000 shares
to 7,500,000 shares and (ii) decrease the number of authorized shares of
preferred stock from 5,000,000 shares to 500,000 shares.
BROKER
NON-
IN FAVOR OPPOSED ABSTAIN VOTES
-------- ------- ------- -------
1,705,407 1,120 577 940,420
2. The election of two (2) Class II directors to serve until the Annual Meeting
of the stockholders for the year ending December 31, 2006:
NOMINEE IN FAVOR OPPOSED ABSTAIN
------- -------- ------- -------
James Sutter 2,645,569 0 1,955
Sanjay Vaswani 2,645,569 0 1,955
3. To ratify the appointment of Burr, Pilger & Mayer LLP as the independent
auditors of the Company for the fiscal year ending December 31, 2004.
IN FAVOR OPPOSED ABSTAIN
-------- ------- -------
2,645,435 1,505 584
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
3.2 Amended and Restated Certificate of Incorporation of
Persistence as filed on July 12, 2004.
3.4 Amended and Restated Bylaws of Persistence as amended on July
21, 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.
27
(b) REPORTS ON FORM 8-K:
Reports on Form 8-K. Two reports on Form 8-K and one report on Form 8-K/A
were filed during the quarter ended June 30, 2004: one report on From 8-K was
filed on May 18, 2004, reporting matters under Item 4 (Changes in Registrant's
Certifying Accountant), one report on Form 8-K/A was filed on May 27, 2004,
reporting matters under Items 4 (Changes in Registrant's Certifying Accountant)
and 7 (Financial Statements, Pro Forma Financial Information and Exhibits), and
one report on Form 8-K was filed on July 22, 2004, reporting matters under Items
7 (Financial Statements, Pro Forma Financial Information and Exhibits) and 12
(Results of Operations and Financial Condition.)
28
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: August 13, 2004
29
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
3.2 Amended and Restated Certificate of Incorporation of
Persistence, as filed on July 12, 2004.
3.4 Amended and Restated Bylaws of Persistence, as amended on July
21, 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.
30