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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-25857
================================================================================
PERSISTENCE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3138935
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(Address of principal executive offices, including zip code)
(650) 372-3600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 2001, there were 20,019,148 shares of the registrant's Common
Stock outstanding.
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INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 AND
DECEMBER 31, 2000.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND
SIX MONTHS ENDED JUNE 30, 2001 AND 2000.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 2001 AND 2000.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
--------------------------
JUNE 30, DECEMBER 31,
2001 2000
----------- --------------
(UNAUDITED) (EXTRACTED)[1]
Assets:
Current assets:
Cash and cash equivalents $ 6,938 $ 14,103
Short-term investments 2,541 5,387
Accounts receivable, net 5,391 7,121
Prepaid expenses and other current assets 652 831
-------- --------
Total current assets 15,522 27,442
Property and equipment, net 1,132 1,777
Purchased intangibles, net 1,244 4,310
Other assets 118 112
-------- --------
Total assets $ 18,015 $ 33,641
======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 448 $ 1,657
Accrued compensation and related benefits 1,164 2,787
Other accrued liabilities 1,183 1,731
Deferred revenues 1,713 2,682
Current portion of long-term obligations 1,186 1,296
-------- --------
Total current liabilities 5,694 10,153
Long-term obligations 779 932
-------- --------
Total liabilities 6,473 11,085
-------- --------
Stockholders' equity:
Preferred stock -- --
Common stock 64,065 63,994
Unamortized deferred stock compensation (231) (592)
Notes receivable from stockholders (54) (94)
Accumulated deficit (52,192) (40,798)
Accumulated other comprehensive loss (46) 46
-------- --------
Total stockholders' equity 11,542 22,556
-------- --------
Total liabilities and stockholders' equity $ 18,015 $ 33,641
======== ========
[1] The condensed consolidated balance sheet as of December 31, 2000 has been
extracted from the consolidated financial statements as of that date, and
does not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
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PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUN. 30, JUN. 30, JUN. 30, JUN. 30,
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Revenues:
Licenses $ 2,538 $ 4,402 $ 4,669 $ 7,283
Service 2,213 1,556 4,948 2,885
-------- -------- -------- --------
Total revenues 4,751 5,958 9,617 10,168
-------- -------- -------- --------
Cost of revenues:
Licenses 1 16 6 66
Service 1,189 902 2,362 1,617
-------- -------- -------- --------
Total cost of revenues 1,190 918 2,368 1,683
-------- -------- -------- --------
Gross profit 3,561 5,040 7,249 8,485
-------- -------- -------- --------
Operating expenses:
Sales and marketing 3,819 5,255 8,168 11,253
Research and development, excluding
amortization of purchased intangibles 1,583 2,213 3,331 4,226
General and administrative 1,394 1,492 2,768 2,359
Amortization and impairment of purchased
intangibles 2,458 771 3,177 1,267
Restructuring costs 688 -- 1,473 --
Total operating expenses 9,942 9,731 18,917 19,105
-------- -------- -------- --------
Loss from operations (6,381) (4,691) (11,668) (10,620)
Interest income 115 318 319 698
Interest and other expense (18) (28) (45) (41)
-------- -------- -------- --------
Net loss $ (6,285) $ (4,401) $(11,394) $ (9,963)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.32) $ (0.23) $ (0.57) $ (0.52)
======== ======== ======== ========
Shares used in calculating basic
and diluted net loss per share 19,916 19,148 19,854 19,055
======== ======== ======== ========
See notes to condensed consolidated financial statements.
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PERSISTENCE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
-----------------------------
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,394) $ (9,963)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,090 1,550
Impairment of purchased intangibles 1,988 --
Amortization of deferred stock compensation 162 255
Loss on sale of fixed assets 154 --
Provision for doubtful accounts 160 395
Changes in operating assets and liabilities:
Accounts receivable 1,571 380
Prepaid expenses and other currents assets 613 (996)
Accounts payable (1,209) 742
Accrued compensation and related benefits (1,623) 1,214
Other accrued liabilities (548) 604
Deferred revenues (969) 723
-------- --------
Net cash used in operating activities (10,005) (5,096)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments 2,846 3,720
Purchase of property and equipment (36) (686)
Proceeds from sale of property and equipment 81 --
Deposits and other (6) (3)
-------- --------
Net cash provided by investing activities 2,885 3,031
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of repurchases 270 25
Repayment of notes receivable from stockholders 40 --
Repayment of capital lease obligations (26) (191)
Repayment of obligations incurred to acquire purchased
intangibles (205) --
Borrowing under loan agreement 122 --
Repayment under loan agreement (154) --
-------- --------
Net cash provided by (used in) financing
activities 47 (166)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (92) --
-------- --------
CASH AND CASH EQUIVALENTS:
Net decrease (7,165) (2,231)
Beginning of period 14,103 22,300
-------- --------
End of period $ 6,938 $ 20,069
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for purchased intangibles $ -- $ 3,063
======== ========
Release of compensatory stock arrangements $ 252 $ --
======== ========
Compensatory stock arrangements $ (53) $ --
======== ========
See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Persistence is a leading provider of transaction application servers and
dynamic Web content acceleration servers -- software that processes transactions
between users and back-end computer systems in electronic commerce systems.
Persistence's PowerTier application server software caches corporate application
data to speed business transactions, while the Company's Dynamai
application-aware software is designed to cache dynamic Web content to speed
Internet transactions.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this filing on
Form 10-Q as of June 30, 2001 and for the three and six month periods ended June
30, 2001 and 2000 have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission for interim
financial statements. Certain information and footnote disclosures normally
included in complete financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The December 31, 2000 balance sheet was extracted from
audited financial statements as of and for the year ended that date, but does
not include all disclosures required by generally accepted accounting principles
for complete financial statements. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the annual consolidated financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K as of and for year ended December 31,
2000 filed with the Securities and Exchange Commission.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's condensed
consolidated financial position as of June 30, 2001, its condensed consolidated
results of operations for the three and six month periods ended June 30, 2001
and 2000, and its cash flows for the three and six month periods ended June 30,
2001 and 2000, have been made. The results of operations and cash flows for any
interim period are not necessarily indicative of the operating results and cash
flows for any future interim or annual periods.
Certain reclassifications have been made to the 2000 financial statement
presentations to conform them to the current year periods' presentations.
3. NET LOSS PER SHARE
Basic net loss per common share excludes dilution and is computed by dividing
net loss by the weighted average number of common shares outstanding for the
period (excluding shares subject to repurchase). Diluted net loss per common
share was the same as basic net loss per common share for all periods presented,
since the effect of any potentially dilutive securities is excluded as they are
anti-dilutive because of the Company's net losses.
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands, except per share
amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net loss (numerator), basic and
diluted $ (6,285) $ (4,401) $(11,394) $ (9,963)
======== ======== ======== ========
Shares (denominator):
Weighted average common shares
outstanding 19,946 19,460 19,892 19,397
Weighted average common shares
outstanding subject to
repurchase (30) (312) (38) (342)
-------- -------- -------- --------
Shares used in computation,
basic and diluted 19,916 19,148 19,854 19,055
======== ======== ======== ========
Net loss per share, basic and
diluted $ (0.32) $ (0.23) $ (0.57) $ (0.52)
======== ======== ======== ========
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As of June 30, 2001 and 2000, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been anti-dilutive. Such outstanding
securities consist of the following (in thousands):
JUNE 30, JUNE 30,
2001 2000
-------- --------
Shares of common stock subject to repurchase 21 286
Outstanding options 1,972 3,708
Outstanding warrants 80 --
----- -----
Total 2,073 3,994
----- -----
4. COMPREHENSIVE INCOME
For all periods presented, the Company had no comprehensive income items
other than net loss and changes in the cumulative translation adjustment.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement requires companies
to record derivatives on the balance sheet as assets or liabilities measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 was effective for the
Company's fiscal year beginning January 1, 2001. The impact of adopting this
standard was not material to our financial statements because the Company has
not entered into derivative instruments.
In June 2001, the FASB issued No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives will not be amortized, but will
rather be tested at least annually for impairment. We will adopt SFAS No. 142
for the fiscal year beginning January 1, 2002. The impact of adopting this
standard is not expected to be material to our financial statements as the
Company does not currently carry any goodwill or intangible assets with
indefinite lives.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our consolidated
financial statements as of December 31, 2000 and 1999 and for each of the years
ended December 31, 2000, 1999 and 1998, included in our Annual Report on Form
10-K as of and for the year ended December 31, 2000 filed with the Securities
and Exchange Commission. In addition, this Management's Discussion and Analysis
of Financial Condition and Results of Operations and other parts of this Form
10-Q contain forward-looking statements that involve risks and uncertainties.
Words such as "anticipates," "believes," "plans," "expects," "future,"
"intends," "targeting," and similar expressions identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or forecasted. Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled "Additional Factors That May Affect Future Results" and those appearing
elsewhere in this Form 10-Q and our Annual Report on Form 10-K as of and for the
year ended December 31, 2000 filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. We
assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting forward-looking
statements.
OVERVIEW
Persistence is a leading provider of transactional application servers and
dynamic Web content acceleration servers - software that processes transactions
between users and back-end computer systems in electronic commerce systems. We
were incorporated and
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began operations in 1991. Our first products incorporated patented
object-to-relational mapping and caching technologies, which have since become
the foundation for our PowerTier product family. From 1992 to 1996, we
introduced a variety of enhancements to these products, including a patented
data transformation technology for mapping objects to database tables, and
caching capabilities.
In 1996, we developed our PowerTier transactional application server, which
integrates all of the previously released Persistence products with new shared
transactional caching technologies, which enable multiple users to
simultaneously access the same cached data. We first shipped our PowerTier for
C++ transactional application server in 1997. Sales of PowerTier for C++
accounted for the majority of our revenues in 1997, 1998, and 1999, during which
years we added a professional services staff to enable our customers to
implement PowerTier more rapidly. We were one of the first companies to adopt
and implement the EJB specification. In 1998, we introduced PowerTier for EJB,
which customers have frequently purchased together with PowerTier for C++. Our
most recent version of PowerTier for EJB/J2EE is currently in use by several
major customers and was commercially released in March 2000. In November 2000,
we introduced PowerTier for J2EE which incorporates our PowerTier for EJB
products. We currently plan to continue to focus product development efforts on
enhancements to both the PowerTier for C++ and the PowerTier for EJB/J2EE
products.
Our revenues, which consist of software license revenues and service
revenues, totaled $9.6 million in the six months ended June 30, 2001, and $10.2
million in the six months ended June 30, 2000. Revenues for 2000 totaled $25.3
million, $14.4 million in 1999 and $10.2 million in 1998. License revenues
consist of licenses of our software products, which generally are priced based
on the number of users or servers. Service revenues consist of professional
services consulting, customer support and training. Because we only commenced
selling application servers in 1997, we have a limited operating history in the
application server market. We expect that, as a percentage of total revenues,
sales of PowerTier for EJB/J2EE transaction servers will increase and sales of
PowerTier for C++ will decrease in the future.
We market our software and services primarily through our direct sales
organizations in the United States, the United Kingdom, Germany, and Hong Kong.
Revenues from licenses and services to customers outside the United States were
$4.4 million in the six months ended June 30, 2001, and $3.9 million in the six
months ended June 30, 2000, $7.2 million in 2000, $4.1 million in 1999 and $2.9
million in 1998. Our future success will depend, in part, on our successful
development of international markets for our products.
Historically, we have received a substantial portion of our revenues from
sales to a limited number of customers. Sales to our top five customers
accounted for 51% of revenues in the six months ended June 30, 2001, and 40% of
revenues in the six months ended June 30, 2000. In addition, the identity of our
top five customers has changed from year to year. In the future, it is likely
that a relatively few large customers could continue to account for a relatively
large proportion of our revenues.
To date, we have sold our products and services primarily through our direct
sales force, and we will need to continue to hire sales people, in particular
those with expertise in channel sales, in order to meet our sales goals. In
addition, our ability to achieve significant revenue growth will depend in large
part on our success in establishing and leveraging relationships with systems
integrators and other third parties.
We recognize revenues in accordance with the American Institute of Certified
Public Accountants Statement of Position 97-2, "Software Revenue Recognition,"
as amended by Statements of Position 98-4 and 98-9. Future implementation
guidance relating to these standards or any future standards may result in
unanticipated changes in our revenue recognition practices, and these changes
could affect our future revenues and earnings. In December 1999, the Securities
and Exchange Commission issued Staff Accounting Bulleting ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provided guidance on
the recognition, presentation and disclosure of revenue in the financial
statements. SAB No. 101 outlines basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue recognition
policies. The Company was required to implement SAB No. 101 in the fourth
quarter of the year ended December 31, 2000. The provisions of SAB No. 101 did
not have a material impact on the Company's consolidated financial position or
results of operations.
We recognize license revenues upon shipment of the software if collection of
the resulting receivable is probable, an executed agreement has been signed, the
fee is fixed or determinable and vendor-specific objective evidence exists to
allocate a portion of the total fee to any undelivered elements of the
arrangement. Undelivered elements in these arrangements typically consist of
services. For sales made through distributors, revenue is recognized upon
shipment. Distributors have no right of return. We recognize revenues from
customer training, support and consulting services as the services are
performed. We generally recognize support revenues ratably over the term of the
support contract. If support or professional services are included in an
arrangement that includes a license agreement, amounts related to support or
professional services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price when such elements are sold separately, or,
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when not sold separately, the price established by management having the
relevant authority to make such decision. Arrangements that require significant
modification or customization of software are recognized under the percentage of
completion method.
Since inception, we have incurred substantial research and development costs
and have invested heavily in the expansion of our sales, marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. We had 152 employees as of December 31, 2000 and 104
as of June 30, 2001, representing a decrease of 31%. In April 2001, we released
28 employees as part of a worldwide restructuring and cost reduction objective.
Furthermore, we have incurred net losses in each quarter since 1996 and, as of
June 30, 2001, had an accumulated deficit of $52.2 million. We are currently
targeting that sales and marketing expenses, research and development expenses,
and general and administrative expenses, will remain below 2000 spending levels.
We expect to incur net losses for the year ending December 31, 2001.
We believe that period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as indicative of future performance.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in early stages of development,
particularly companies in new and rapidly evolving markets. We may not achieve
or maintain profitability in the future. Our success depends significantly upon
broad market acceptance of our PowerTier for EJB/J2EE application server.
Because Sun Microsystems controls the EJB/J2EE standard, we need to maintain a
good working relationship with them to develop future versions of PowerTier for
EJB/J2EE, as well as additional products using the EJB/J2EE standard. Our
performance will also depend on the level of capital spending in our target
market of customers and on the growth and widespread adoption of the market for
business-to-business electronic commerce over the Internet.
On May 9, 2001, the Company offered to exchange all outstanding options
granted under the Company's 1997 Stock Plan that had an exercise price in excess
of $1.00 per share and were held by option holders who were employees of the
Company on the date of tender and through the grant date, for new options to
purchase shares of the Company's common stock. This offer expired on June 7,
2001 and resulted in the cancellation of 2,155,032 unexercised options. Subject
to the terms and conditions of the offer, the Company will grant new options
under the 1997 Stock Plan to purchase shares of common stock in exchange for
such tendered options no earlier than six months and one day after June 7, 2001.
The exercise price per share of the new options will equal the fair market value
of the underlying common stock on the date of grant, which is currently
determined as the last reported sale price of the common stock on the Nasdaq
National Market on the grant date.
RESULTS OF OPERATIONS
POTENTIAL QUARTERLY VARIABILITY
Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate in the future, as a result of a number of factors,
many of which are outside our control. These factors include:
- our ability to close relatively large sales on schedule;
- delays or deferrals of customer orders or deployments;
- delays in shipment of scheduled software releases;
- demand for and market acceptance of our PowerTier for C++ and PowerTier
for EJB/J2EE products;
- the possible loss of sales people;
- introduction of new products or services by us or our competitors;
- annual or quarterly budget cycles of our customers;
- the level of product and price competition in the application server
market;
- our lengthy sales cycle;
- our success in maintaining our direct sales force and expanding our
indirect distribution channels;
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- the mix of direct sales versus indirect distribution channel sales;
- the mix of products and services licensed or sold;
- the mix of domestic and international sales; and
- our success in penetrating international markets and general economic
conditions in these markets.
The typical sales cycle of our products is long and unpredictable, and is
affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter to gain price concessions. Because a substantial portion of our
costs are relatively fixed and based on anticipated revenues, a failure to book
an expected order in a given quarter would not be offset by a corresponding
reduction in costs and could adversely affect our operating results.
The results of operations and cash flows for any interim period are not
necessarily indicative of the operating results and cash flows for any future
interim or annual periods.
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
REVENUES
Our revenues were $4.8 million for the three months ended June 30, 2001 and
$6.0 million for the three months ended June 30, 2000 representing a decrease of
20%. International revenues were $2.4 million, for the three months ended June
30, 2001 and $4.8 million for the three months ended June 30, 2000. In the
three months ended June 30, 2001, sales to Salomon Smith Barney accounted for
16% of total revenues and sales to Infron accounted for 15% of total revenues.
LICENSE REVENUES. License revenues consist of licenses of our software
products, which generally are priced based on the number of users or servers.
License revenues were $2.5 million for the three months ended June 30, 2001 and
$4.4 million for the three months ended June 30, 2000, representing a decrease
of 43%. License revenues represented 52% of total revenues for the three months
ended June 30, 2001 and 73% of total revenues for the three months ended June
30, 2000. The decrease in software license revenues was due in part to the
general slowdown in technology spending experienced by many vendors during the
second quarter and our focus on certain consulting projects with significant
service components.
SERVICE REVENUES. Service revenues consist of professional services
consulting, customer support and training. Our service revenues were $2.2
million for the three months ended June 30, 2001 and $1.6 million for the three
months ended June 30, 2000, representing an increase of 38%. The increase in
service revenues was primarily due to our focus in the second quarter on certain
consulting projects. Service revenues represented 46% of total revenues for the
three months ended June 30, 2001 and 27% of total revenues for the three months
ended June 30, 2000.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists of packaging,
documentation and associated shipping costs. Our cost of license revenues was
$1,000 for the three months ended June 30, 2001 and $16,000 for the three months
ended June 30, 2000. These costs are expensed as incurred and not carried in
inventory. Consequently, the costs can be markedly different from one period to
another and may bear no direct relationship to license revenue.
COST OF SERVICE REVENUES. Cost of service revenues consists of personnel and
other costs related to professional services, technical support and training.
Our cost of service revenues was $1.2 million for the three months ended June
30, 2001 and $0.9 million for the three months ended June 30, 2000, representing
an increase of 33%. This increase was primarily related to professional services
provided on various consulting projects. Cost of service revenues as a
percentage of service revenues may vary between periods due to our use of third
party professional services.
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OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses were $3.8 million for the three months ended June 30, 2001 and $5.3
million for the three months ended June 30, 2000, representing a decrease of
28%. This decrease was primarily due to a reorganization of our sales and
marketing departments and includes savings from the elimination of several
management and staff positions, a reduction in the number of trade shows
attended and a decrease in general promotion, public relations and market
research spending. Sales and marketing expenses represented 80% of total
revenues for the three months ended June 30, 2001 and 88% of total revenues for
the three months ended June 30, 2000. We are presently targeting sales and
marketing expense levels to be below comparable 2000 expense levels.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily
of salaries and benefits for software developers, product managers and quality
assurance personnel and payments to outside software developers. Our research
and development expenses were $1.6 million for the three months ended June 30,
2001 and $2.2 million for the three months ended June 30, 2000, representing a
decrease of 27%. This decrease was primarily due to reductions during the second
quarter of 2001 in personnel, external consultants, travel and recruiting costs.
We are presently targeting research and development expense levels to be below
comparable 2000 expense levels.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and general management personnel. Our general and administrative
expenses were $1.4 million for the three months ended June 30, 2001 and $1.5
million for the three months ended June 30, 2000, representing a decrease of 7%.
This decrease was principally related to reductions in personnel costs. We are
presently targeting general and administrative expense levels to be below
comparable 2000 expense levels.
AMORTIZATION AND IMPAIRMENT OF PURCHASED INTANGIBLES. Amortization and
impairment of purchased intangibles was $2.5 million for the three months ended
June 30, 2001 and $0.8 million for the three months ended June 30, 2000. Based
on an evaluation of our purchased intangibles at June 30, 2001, we recorded an
impairment charge of $2.0 million in the second quarter of 2001 to write down
the carrying value of these assets to their net realizable values, which reflect
the expected economic benefits to be derived from the use of these assets.
NET INTEREST INCOME. Net interest income consists primarily of earnings on
our cash, cash equivalent and short-term investment balances, offset by interest
expense related to obligations under capital leases and other borrowings. Net
interest income was $97,000 for the three months ended June 30, 2001 and
$290,000 for the three months ended June 30, 2000, representing a decrease of
$193,000. This decrease was primarily due to a reduction in our short-term
investment balances and a general reduction in market interest rates. We expect
that net interest income will decrease as we continue to use the net proceeds
from our initial public offering.
STOCK-BASED COMPENSATION. Some options granted and common stock issued during
the three months ended June 30, 2001 and the years ended December 31, 2000,
1999, 1998 and 1997 have been considered to be compensatory, as the estimated
fair value for accounting purposes was greater than the stock price as
determined by the board of directors on the date of grant or issuance. Total
deferred stock compensation associated with equity transactions as of June 30,
2001 was $231,000, net of amortization. Deferred stock compensation is being
amortized ratably over the vesting periods of these securities. Amortization
expense was $60,000 in the three months ended June 30, 2001 and $156,000 in the
three months ended June 30, 2000.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
We have placed a full valuation allowance against our net deferred tax assets
due to the uncertainty surrounding the realization of these assets. We evaluate
on a quarterly basis the recoverability of the net deferred tax assets and the
level of the valuation allowance. If and when we determine that it is more
likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
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SIX MONTHS ENDED JUNE 30, 2001 AND 2000
REVENUES
Our revenues were $9.6 million for the six months ended June 30, 2001 and
$10.2 million for the six months ended June 30, 2000 representing a decrease of
6%. International revenues were $4.4 million for the six months ended June 30,
2001 and $3.9 million for the six months ended June 30, 2000. In the six months
ended June 30, 2001, sales to Salomon Smith Barney accounted for 18% of revenues
and sales to Intershop accounted for 9% of revenues. For the six months ended
June 30, 2000, sales to Cisco accounted for 11% of our total revenues and sales
to Intershop accounted for 10% of revenues.
LICENSE REVENUES. License revenues consist of licenses of our software
products, which generally are priced based on the number of users or servers.
License revenues were $4.7 million for the six months ended June 30, 2001 and
$7.3 million for the six months ended June 30, 2000, representing a decrease of
36%. License revenues represented 49% of total revenues for the six months ended
June 30, 2001 and 72% of total revenues for the six months ended June 30, 2000.
The decrease in software license revenues was due in part to the general
slowdown in technology spending experienced by many vendors during the first six
months of 2001. In addition, our focus on certain large projects with
significant service components also contributed to the overall reduction in
license revenues.
SERVICE REVENUES. Service revenues consist of professional services
consulting, customer support and training. Our service revenues were $4.9
million for the six months ended June 30, 2001 and $2.9 million for the six
months ended June 30, 2000, representing an increase of 69%. The increase in
service revenues was primarily due to our focus in the first six months of 2001
on certain large projects involving higher elements of professional services
revenue. Service revenues represented 51% of total revenues for the six months
ended June 30, 2001 and 28% of total revenues for the six months ended June 30,
2000.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists of packaging,
documentation and associated shipping costs. Our cost of license revenues was
$6,000 for the six months ended June 30, 2001 and $66,000 for the six months
ended June 30, 2000. As a percentage of license revenues, cost of license
revenues was 0.1% for the six months ended June 30, 2001 and 1% for the six
months ended June 30, 2000. These costs are expensed as incurred and not carried
in inventory. Consequently, the costs can be markedly different from one period
to another and may bear no direct relationship to license revenue.
COST OF SERVICE REVENUES. Cost of service revenues consists of personnel and
other costs related to professional services, technical support and training.
Our cost of service revenues was $2.4 million for the six months ended June 30,
2001 and $1.6 million for the six months ended June 30, 2000, representing an
increase of 50%. This increase was primarily due to professional services
provided on certain large projects at Salomon Smith Barney. As a percentage of
service revenues, cost of service revenues were 48% for the six months ended
June 30, 2001 and 56% for the six months ended June 30, 2000. Cost of service
revenues as a percentage of service revenues may vary between periods due to our
use of third party professional services.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses were $8.2 million for the six months ended June 30, 2001 and $11.3
million for the six months ended June 30, 2000, representing a decrease of 27%.
This decrease was primarily due to a reorganization of our marketing department
during the first six months of 2001, including the elimination of several
management and staff positions, a reduction in the number of trade shows
attended and a decrease in general promotion, public relations and market
research spending. Sales and marketing expenses represented 85% of total
revenues for the six months ended June 30, 2001 and 111% of total revenues for
the six months ended June 30, 2000. We are presently targeting sales and
marketing expense levels to be below comparable 2000 expense levels.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily
of salaries and benefits for software developers, product managers and quality
assurance personnel and payments to outside software developers. Our research
and development expenses were $3.3 million for the six months ended June 30,
2001 and $4.2 million for the six months ended June 30, 2000, representing a
decrease of 21%. This decrease was primarily due to reductions during the
second quarter in personnel, external consultants, travel and recruiting costs.
Research and development expenses represented 35% of total revenues for the six
months ended June 30, 2001 and 42% of total revenues for the six months ended
June 30, 2000. We are presently targeting research and development expense
levels to be below comparable 2000 expense levels.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and general management personnel. Our general and administrative
expenses were $2.8 million for the six months ended June 30, 2001 and $2.4
million for the six months ended June 30, 2000, representing an increase of 17%.
This increase was due to increases in legal settlement and other professional
service expenses. General and administrative expenses represented 29% of total
revenues for the six months ended June 30, 2001 and 23% of total revenues for
the six months ended June 30, 2000. We are presently targeting general and
administrative expense levels to be below comparable 2000 expense levels.
AMORTIZATION AND IMPAIRMENT OF PURCHASED INTANGIBLES. Amortization and
impairment of purchased intangibles was $3.2 million for the six months ended
June 30, 2001 and $1.3 million for the six months ended June 30, 2000. Based on
an evaluation of our purchased intangibles at June 30, 2001, we recorded an
impairment charge of $2.0 million to write down the carrying value of these
assets to their net realizable values, which reflect the expected economic
benefits to be derived from the use of these assets.
NET INTEREST INCOME. Net interest income consists primarily of earnings on
our cash, cash equivalent and short-term investment balances, offset by interest
expense related to obligations under capital leases and other borrowings. Net
interest income was $274,000 for the six months ended June 30, 2001 and $657,000
for the six months ended June 30, 2000, representing a decrease of $383,000.
This decrease was primarily due to a reduction in our short-term investment
balances and a general reduction in market interest rates. We expect that net
interest income will decrease as we continue to use the net proceeds from our
initial public offering.
STOCK-BASED COMPENSATION. Some options granted and common stock issued during
the six months ended June 30, 2001 and the years ended December 31, 2000, 1999,
1998 and 1997 have been considered to be compensatory, as the estimated fair
value for accounting purposes was greater than the stock price as determined by
the board of directors on the date of grant or issuance. Total deferred stock
compensation associated with equity transactions as of June 30, 2001 was
$231,000, net of amortization. Deferred stock compensation is being amortized
ratably over the vesting periods of these securities. Amortization expense was
$162,000 in the six months ended June 30, 2001 and $255,000 in the six months
ended June 30, 2000.
PROVISION FOR INCOME TAXES. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit.
We have placed a full valuation allowance against our net deferred tax assets
due to the uncertainty surrounding the realization of these assets. We evaluate
on a quarterly basis the recoverability of the net deferred tax assets and the
level of the valuation allowance. If and when we determine that it is more
likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through our initial
public offering of common stock in June 1999, which totaled $34.1 million in
aggregate net proceeds, and private sales of convertible preferred stock, which
totaled $19.9 million in aggregate net proceeds. We have also financed our
business through a loan in the maximum principal amount of $800,000, borrowings
in the maximum principal amount of $655,000 under an equipment financing
facility, and capitalized leases. As of June 30, 2001, we had $9.5 million of
cash, cash equivalents and short-term investments and $9.8 million of working
capital.
Net cash used in operating activities was $10.0 million for the six months
ended June 30, 2001 and $5.1 million for the six months ended June 30, 2000. For
each of the six months ended June 30, 2001 and 2000, cash used in operating
activities was attributable primarily to net operating losses. Those losses were
partially offset by depreciation and amortization, amortization of deferred
stock compensation and decrease in accounts receivable.
Net cash provided by investing activities was $2.9 million in the six months
ended June 30, 2001 and $3.0 million in the six months ended June 30, 2000. For
the six months ended June 30, 2001, cash was provided by investing activities
through the conversion of short-term investments into cash and cash equivalents
and by the sale of surplus property and equipment. For the six months ended June
30, 2000, cash was provided by investing activities through the conversion of
short-term investments into cash and cash equivalents, partially offset by the
purchase of property and equipment.
Net cash provided by financing activities was $47,000 in the six months ended
June 30, 2001 and net cash used in financing activities was $166,000 in the six
months ended June 30, 2000. Cash provided by financing activities during the six
months ended June 30, 2001 was primarily attributable to the sale of common
stock, offset by the repayment of obligations incurred to acquire
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purchased intangibles. Cash used in financing activities during the six months
ended June 30, 2000 was primarily attributable to the repayment of financing
obligations.
We have credit facilities with Comerica Bank. Under those credit facilities,
the Company has a $5.0 million revolving line of credit facility available
through October 31, 2001, an $800,000 equipment term loan, and a second
equipment financing facility of $655,000. As of June 30, 2001 we had no
borrowings outstanding under the revolving line of credit facility. As of June
30, 2001, we had a promissory note in favor of Comerica related to our first
equipment term loan, under which $200,000 out of an original $800,000 was
outstanding. We are required to make principal payments of $22,222 per month
plus interest of 7.75% per annum on the unpaid principal balance, payable in 18
monthly installments. As of June 30, 2001 we had $633,000 outstanding under the
second equipment financing facility. Under this facility, borrowings of $655,000
outstanding on May 1, 2001 converted to a 30-month term loan with the first
payment commencing on June 1, 2001. We are required to make principal payments
of $21,843 per month, plus interest, at the bank's base rate plus 0.50% per
annum. The bank's credit facilities require the Company, among other things, to
maintain a minimum tangible net worth of $10 million and a minimum quick ratio
(current assets not including inventory less current liabilities) of 2 to 1. As
of June 30, 2001, we were in compliance with our debt covenants. Borrowings
under the facilities are collateralized by substantially all of the Company's
assets.
Currently we have no material commitments for capital expenditures nor do we
anticipate a material increase in capital expenditures and lease commitments. We
may increase our capital expenditures if we expand into additional international
markets.
Based upon our current forecasts and estimates, we are targeting that our
current cash, cash equivalents and short-term investments, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
through at least December 31, 2001. If cash generated from operations is
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities or to obtain a credit facility. If
additional funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and the term of this debt could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders, and we may not be able to
obtain additional financing on acceptable terms, if at all. If we are unable to
obtain additional financing as and when needed and on acceptable terms, we may
be required to reduce the scope of our planned product development and marketing
efforts, which could jeopardize our business.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks in addition to the other
information contained in this quarterly report on form 10-Q as well as in our
annual report on Form 10-K. The risks and uncertainties described below are
intended to be the ones that are specific to our company or industry and that we
deem to be material, but are not the only ones that we face.
WE HAVE A LIMITED OPERATING HISTORY IN THE APPLICATION SERVER MARKET.
Because we only commenced selling application servers in 1997, we have a
limited operating history in the application server market. We thus face the
risks, expenses and difficulties frequently encountered by companies in early
stages of development, particularly companies in the rapidly changing software
industry. These risks include:
- the timing and magnitude of capital expenditures by our customers and
prospective customers;
- our substantial dependence for revenue from our PowerTier for C++
product, which was first introduced in 1997 and has achieved only
limited market acceptance;
- our substantial dependence for revenue from our PowerTier for EJB/J2EE
product, which was first introduced in 1998 and has achieved only
limited market acceptance;
- our need to expand our distribution capability through various sales
channels, including a direct sales organization, original equipment
manufacturers, third party distributors and systems integrators;
- our unproven ability to anticipate and respond to technological and
competitive developments in the rapidly changing market for application
servers;
- our unproven ability to compete in a highly competitive market;
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- uncertainty as to the growth rate in the electronic commerce market
and, in particular, the business-to-business electronic commerce
market;
- our need to achieve market acceptance for our new product
introductions, including Dynamai;
- our dependence on Enterprise JavaBeans, commonly known as EJB/J2EE,
becoming a widely accepted standard in the transactional application
server market; and
- our dependence upon key personnel.
BECAUSE WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW, WE MAY NEVER BECOME
OR REMAIN PROFITABLE.
We may not achieve our targeted revenues and we may not be able to achieve or
maintain profitability in the future. We have incurred net losses each year
since 1996. In particular, we incurred losses of $11.4 million in the six months
ended June 30, 2001, $16.7 million in 2000, $11.3 million in 1999, $4.1 million
in 1998 and $4.7 million in 1997. As of June 30, 2001, we had an accumulated
deficit of $52.2 million. While we are currently targeting decreases in sales
and marketing, research and development, and general and administrative expenses
for 2001 as compared to 2000, we will still need to achieve our revenue targets
to become profitable on a pro forma basis. Because our product market is new and
evolving, we cannot accurately predict either the future growth rate, if any, or
the ultimate size of the market for our products.
WE HAVE FINANCED OUR BUSINESS THROUGH THE SALE OF STOCK AND NOT THROUGH CASH
GENERATED BY OUR OPERATIONS.
Since inception, we have generally had negative cash flow from operations. To
date, we have financed our business primarily through sales of common stock and
convertible preferred stock and not through cash generated by our operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE.
Although we believe that our current cash, cash equivalents and short-term
investment balances will be sufficient to meet our anticipated operating cash
needs through at least December 31, 2001, we may need to raise additional funds
prior to that time. We face several risks in connection with this possible need
to raise additional capital:
- the issuance of additional securities could result in:
- debt securities with rights senior to the common stock;
- dilution to existing stockholders as a result of issuing additional
equity or convertible debt securities;
- debt securities with restrictive covenants that could restrict our
ability to run our business as desired; or
- securities issued on disadvantageous financial terms.
- the failure to procure needed funding could result in:
- a dramatic reduction in scope in our planned product development or
marketing efforts; or
- an inability to respond to competitive pressures or take advantage
of market opportunities.
If we are unable to obtain additional financing as and when needed and on
acceptable terms, we may be required to reduce the scope of our planned product
development and marketing efforts, which could jeopardize our business.
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THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE PRICE OF
OUR COMMON STOCK.
Our operating results have fluctuated significantly in the past and may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside our control. In particular, the fourth quarter of each year
has in the past tended to account for the greatest percentage of total revenues
for the year, and we have often experienced an absolute decline in revenues from
the fourth quarter to the first quarter of the next year. However, this trend
may not be repeated in the third and fourth quarters of 2001. If our future
quarterly operating results are below the expectations of securities analysts or
investors, the price of our common stock would likely decline. The factors that
may cause fluctuations of our operating results include the following:
- our ability to close relatively large sales on schedule;
- delays or deferrals of customer orders or deployments;
- delays in shipment of scheduled software releases;
- demand for and market acceptance of our PowerTier products and other
products we introduce;
- the possible loss of sales people;
- introduction of new products or services by us or our competitors;
- annual or quarterly budget cycles of our customers;
- the level of product and price competition in the application server
and web content acceleration server markets;
- our lengthy sales cycle;
- our success in expanding our various sales channels, including a direct
sales force and indirect distribution channels;
- the mix of direct sales versus indirect distribution channel sales;
- the mix of products and services licensed or sold;
- the mix of domestic and international sales; and
- our success in penetrating international markets and general economic
conditions in these markets.
We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. Because a
substantial portion of our costs are relatively fixed and based on anticipated
revenues, a failure to book an expected order in a given quarter would not be
offset by a corresponding reduction in costs and could adversely affect our
operating results.
OUR SALES CYCLE IS LONG, UNPREDICTABLE AND SUBJECT TO SEASONAL FLUCTUATIONS, SO
IT IS DIFFICULT TO FORECAST OUR REVENUES.
Any delay in sales of our products or services could cause our quarterly
revenues and operating results to fluctuate. The typical sales cycle of our
products is long and unpredictable and requires both a significant capital
investment decision by our customers and our education of potential customers
regarding the use and benefits of our products. Our sales cycle is generally
between three and nine months. A successful sales cycle typically includes
presentations to both business and technical decision makers, as well as a
limited pilot program to establish technical fit. Our products typically are
purchased as part of a significant enhancement to a customer's information
technology system. The implementation of our products involves a significant
commitment of resources by prospective customers. Accordingly, a purchase
decision for a potential customer typically requires the approval of several
senior decision makers. Our sales cycle is affected by the business conditions
of each prospective customer, as well as the overall economic climate for
technology-related capital expenditures. Due to the relative importance of many
of our product sales, a lost or delayed sale
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could adversely affect our quarterly operating results. Our sales cycle is
affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF
ONE OR MORE OF THESE CUSTOMERS COULD RESULT IN A DECREASE IN OUR REVENUES.
Historically, we have received a substantial portion of our revenues from
sales to a limited number of customers. In the six months ended June 30, 2001,
sales to our top five customers accounted for 51% of total revenues. In 2000,
sales to Salomon Smith Barney accounted for 16% of total revenues and sales to
our top five customers accounted for 40% of total revenues. In 1999, sales to
Cisco accounted for 13% of our total revenues, and sales to our top five
customers accounted for 35% of total revenues. In 1998, sales to Cisco accounted
for 14% of our total revenues, sales to Instinet accounted for 17% of our total
revenues, and sales to our top five customers accounted for 55% of total
revenues. In addition, the identity of our top five customers has changed from
year to year. If we lose a significant customer, or fail to increase sales to an
existing customer as planned, we may not be able to replace the lost revenues
with sales to other customers. In addition, because our marketing strategy is to
concentrate on sales to industry leaders, any loss of a customer could harm our
reputation within the industry and make it harder for us to sell to other
companies in that industry. The loss of, or a reduction in sales to, one or more
significant customers would likely result in a decrease in our revenues.
WE DEPEND ON THE JAVA PROGRAMMING LANGUAGE, THE ENTERPRISE JAVABEANS STANDARD
AND THE EMERGING MARKET FOR DISTRIBUTED OBJECT COMPUTING, AND IF THESE
TECHNOLOGIES FAIL TO GAIN ACCEPTANCE, OUR BUSINESS COULD SUFFER.
We are focusing significant marketing efforts on our PowerTier for J2EE
application server, which is based on three relatively new technologies, which
have not been widely adopted by a large number of companies. These three
technologies are a distributed object computing architecture, Sun Microsystems'
Java programming language and J2EE (formerly EJB). Distributed object computing
combines the use of software modules, or objects, communicating across a
computer network to software applications, such as our PowerTier application
server. J2EE is the Java programming standard for use in an application server.
In 1998, we launched our PowerTier for EJB product, which is a transactional
application server that uses Java and conformed to the EJB standard. Sun
Microsystems released the EJB standard in 1998, and thus far EJB has had limited
market acceptance. Since our PowerTier for J2EE product depends upon the
specialized J2EE standard, we face a limited market compared to competitors who
may offer application servers based on more widely accepted standards, including
the Java programming language. We expect a substantial portion of our future
revenues will come from sales of products based on the J2EE standard. Thus, our
success depends significantly upon broad market acceptance of distributed object
computing in general, and Java application servers in particular. If J2EE does
not become a widespread programming standard for application servers, our
revenues and business could suffer.
IF WE DO NOT DELIVER PRODUCTS THAT MEET RAPIDLY CHANGING TECHNOLOGY STANDARDS
AND CUSTOMER DEMANDS, WE WILL LOSE MARKET SHARE TO OUR COMPETITORS.
The market for our products and services is characterized by rapid
technological change, dynamic customer demands and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovation in software applications and hardware
configurations and the emergence or adoption of new industry standards,
including Internet technology standards. We may need to increase our research
and development investment to maintain our technological leadership. Our future
success depends on our ability to continue to enhance our current products and
to continue to develop and introduce new products that keep pace with
competitive product introductions and technological developments. For example,
as Sun Microsystems introduces new J2EE specifications, we will need to
introduce new versions of PowerTier for J2EE designed to support these new
specifications to remain competitive. If we do not bring enhancements and new
versions of our products to market in a timely manner, our market share and
revenues could decrease and our reputation could suffer. If we fail to
anticipate or respond adequately to changes in technology and customer needs, or
if there are any significant delays in product development or introduction, our
revenues and business could suffer.
BECAUSE OUR DIRECT SALES TEAM IS CURRENTLY OUR MOST CRITICAL SALES CHANNEL, ANY
FAILURE TO BUILD AND TRAIN THIS TEAM MAY RESULT IN LOWER REVENUES.
We must maintain a strong direct sales team to generate revenues. In the last
several years, we have experienced significant turnover in our sales team, and
in the first six months of 2001, we implemented a reduction in force and
substantially reorganized our sales team. In order to meet our future sales
goals, we may need to hire more salespeople for both our domestic and
international sales efforts. In the past, newly hired employees have required
training and approximately six to nine months experience to achieve full
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productivity. Like many companies in the software industry, we are likely to
continue to experience turnover in our sales force, in particular as a result of
our recent restructuring, and thus a number of our sales people at any given
time may be relatively new and may not meet our sales goals. In addition, our
recently hired employees may not become productive, and we may not be able to
hire enough qualified individuals in the future.
BECAUSE OUR FUTURE REVENUE GOALS ARE BASED ON OUR DEVELOPMENT OF A STRONG SALES
CHANNEL THROUGH SYSTEMS INTEGRATORS AND OTHER THIRD PARTIES, ANY FAILURE TO
DEVELOP THIS CHANNEL MAY RESULT IN LOWER REVENUES.
To date, we have sold our products primarily through our direct sales force,
but our ability to achieve significant revenue growth in the future will depend
in large part on our success in establishing and leveraging relationships with
systems integrators and third parties. It may be difficult for us to establish
these relationships, and, even if we establish these relationships, we will then
depend on the sales efforts of these third parties. In addition, because these
relationships are nonexclusive, these third parties may choose to sell
application servers or other alternative solutions offered by our competitors,
and not our products. If we fail to successfully build our third-party
distribution channels or if our third party partners do not perform as expected,
our business could be harmed.
BECAUSE OUR PRODUCTS ARE OFTEN INCORPORATED INTO ENTERPRISE-WIDE SYSTEM
DEPLOYMENTS, ANY DELAYS IN THESE PROJECTS MAY RESULT IN LOWER REVENUES.
Because our products are often incorporated into multi-million dollar
enterprise projects, we depend on the successful and timely completion of these
large projects to fully deploy our products and achieve our revenue goals. These
enterprise projects often take many years to complete and can be delayed by a
variety of factors, including general or industry-specific economic downturns,
our customers' budget constraints, other customer-specific delays, problems with
other system components or delays caused by the systems integrators who may be
managing the system deployment. If our customers cannot successfully implement
large-scale deployments, or they determine for any reason that our products
cannot accommodate large-scale deployments or that our products are not
appropriate for widespread use, our business could suffer. In addition, if a
systems integrator fails to complete a project utilizing our product for a
customer in a timely manner, our revenues or business reputation could suffer.
BECAUSE WE COMPETE WITH SUN MICROSYSTEMS, WHO CONTROLS THE EJB/J2EE APPLICATION
SERVER STANDARD, WE FACE THE RISK THAT THEY MAY DEVELOP THIS STANDARD TO FAVOR
THEIR OWN PRODUCTS.
Our success depends on achieving widespread market acceptance of our
PowerTier for J2EE application server. Because Sun Microsystems controls the
J2EE standard, we need to maintain a good working relationship with Sun
Microsystems to develop future versions of PowerTier for J2EE, as well as
additional products using J2EE, that will gain market acceptance. In March 1998,
we entered into a license agreement with Sun Microsystems, pursuant to which we
granted Sun Microsystems rights to manufacture and sell, by itself and not
jointly with others, products under a number of our patents, and Sun
Microsystems granted us rights to manufacture and sell, by ourselves and not
jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell some competing products that
would, in the absence of this license agreement, infringe our patents. Because
Sun Microsystems controls the J2EE standard, it could develop the J2EE standard
in a more proprietary way to favor a product offered by its subsidiary,
i-Planet, or a third party, which could make it much harder for us to compete in
the J2EE application server market.
MICROSOFT HAS ESTABLISHED A COMPETING APPLICATION SERVER STANDARD, WHICH COULD
DIMINISH THE MARKET POTENTIAL FOR OUR PRODUCTS IF IT GAINS WIDESPREAD
ACCEPTANCE.
Microsoft has established a competing standard for distributed computing,
COM, which includes an application server product. If this standard gains
widespread market acceptance over the J2EE or CORBA standards, on which our
products are based, our business would suffer. Because of Microsoft's resources
and commanding position with respect to other markets and technologies,
Microsoft's entry into the application server market may cause our potential
customers to delay purchasing decisions. We expect that Microsoft's presence in
the application server market will increase competitive pressure in this market.
WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES THAN WE
HAVE AND MAY FACE ADDITIONAL COMPETITION IN THE FUTURE.
The market for our products is intensely competitive, subject to rapid change
and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:
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- performance, including scalability, integrity and availability;
- ability to provide a complete software platform;
- flexibility;
- use of standards-based technology;
- ease of integration with customers' existing enterprise systems;
- ease and speed of implementation;
- quality of support and service;
- security;
- company reputation; and
- price.
Our competitors for both PowerTier and Dynamai include both publicly and
privately-held enterprises, including BEA Systems (WebLogic), Secant
Technologies, IBM (WebSphere), Oracle (OAS) and i-Planet (Sun Microsystems).
Many customers may not be willing to purchase our PowerTier platform because
they have already invested heavily in databases and other enterprise software
components offered by these competing companies. Many of these competitors have
preexisting customer relationships, longer operating histories, greater
financial, technical, marketing and other resources, greater name recognition
and larger installed bases of customers than we do. In addition, some
competitors offer products that are less complex than our PowerTier products and
require less customization to implement with potential customers' existing
systems. Thus, potential customers engaged in simpler business-to-business
e-commerce transactions may prefer these "plug-and-play" products to our more
complex offerings. Moreover, there are other very large and established
companies, including Microsoft, who offer alternative solutions and are thus
indirect competitors. Further, dozens of companies have already supported, or
have announced their intention to support J2EE, and may compete against us in
the future. These competitors and potential competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than we can. In addition, in the PowerTier for C++
market, many potential customers build their own custom application servers, so
we effectively compete against our potential customers' internal information
technology departments.
In the Dynamai market, similar dynamic Web content acceleration technology is
available from a variety of sources, including but not limited to internal
development, application server vendors such as Oracle, electronic commerce
software vendors such as Intershop and ATG, content delivery networks such as
Akamai and epicRealm, and emerging software and hardware appliance vendors such
as Chutney and Cachier, who are directly targeting Dynamai's market.
IF THE MARKET FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE OVER THE INTERNET
DOES NOT DEVELOP AS WE CURRENTLY ENVISION, OUR BUSINESS MODEL COULD FAIL AND OUR
REVENUES COULD DECLINE.
Our performance and future success will depend on the growth and widespread
adoption of the market for business-to-business electronic commerce over the
Internet. If business-to-business electronic commerce does not develop in the
manner currently envisioned, our business could be harmed. Moreover, critical
issues concerning the commercial use of the Internet, including security, cost,
accessibility and quality of network service, remain unresolved and may
negatively affect the growth of the Internet as a platform for conducting
business-to-business electronic commerce. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle increased activity or due to increased government regulation
and taxation of Internet commerce.
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OUR FAILURE TO MANAGE OUR RESOURCES COULD IMPAIR OUR BUSINESS.
Achieving our planned revenue targets and other financial objectives will
place significant demands on our management and other resources. Our ability to
manage our resources effectively will require us to continue to develop and
improve our operational, financial and other internal systems and controls, as
well as our business development capabilities, and to train, motivate and manage
our employees. If we are unable to manage our resources effectively, we may not
be able to retain key personnel and the quality of our services and products may
suffer.
OUR BUSINESS COULD SUFFER IF WE CANNOT ATTRACT AND RETAIN THE SERVICES OF KEY
EMPLOYEES.
Our future success depends on the ability of our management to operate
effectively, both individually and as a group. We are substantially dependent
upon the continued service of our existing executive personnel, especially
Christopher T. Keene, our Chief Executive Officer and Chairman of the Board. We
do not have a key person life insurance policy covering Mr. Keene or any other
officer or key employee. Our success will depend in large part upon our ability
to attract and retain highly-skilled employees, particularly sales personnel and
software engineers. There is significant competition for skilled employees,
especially for people who have experience in both the software and Internet
industries. We have experienced significant turnover among sales personnel in
recent years, which makes retention more challenging, in particular as a result
of our recent restructuring. If we are not successful in attracting and
retaining these skilled employees, our sales and product development efforts
would suffer. In addition, if one or more of our key employees resigns to join a
competitor or to form a competing company, the loss of that employee and any
resulting loss of existing or potential customers to a competitor could harm our
business. If we lose any key personnel, we may not be able to prevent the
unauthorized disclosure or use of our technical knowledge or other trade secrets
by those former employees.
OUR SOFTWARE PRODUCTS MAY CONTAIN DEFECTS OR ERRORS, AND SHIPMENTS OF OUR
SOFTWARE MAY BE DELAYED.
Complex software products often contain errors or defects, particularly when
first introduced or when new versions or enhancements are released. Our products
have in the past contained and may in the future contain errors and defects,
which may be serious or difficult to correct and which may cause delays in
subsequent product releases. Delays in shipment of scheduled software releases
or serious defects or errors could result in lost revenues or a delay in market
acceptance, which could have a material adverse effect on our revenues and
reputation.
WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN THEIR CRITICAL BUSINESS SYSTEMS.
Because our customers use our products for important business applications,
errors, defects or other performance problems could result in financial or other
damages to our customers. They could pursue claims for damages, which, if
successful, could result in our having to make substantial payments. Although
our purchase agreements typically contain provisions designed to limit our
exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions. A
product liability claim brought against us, even if meritless, would likely be
time consuming and costly for us to litigate or settle.
A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM INTERNATIONAL SALES, WHICH
COULD DECLINE AS A RESULT OF LEGAL, BUSINESS AND ECONOMIC RISKS SPECIFIC TO
INTERNATIONAL OPERATIONS.
Our future success will depend, in part, on our successful development of
international markets for our products. Approximately 46% of our revenues came
from sales of products and services outside of the United States for the six
months ended June 30, 2001, and approximately 28% of our revenues came from
sales of products and services outside of the United States during 2000. We
expect international revenues to continue to represent a significant portion of
our total revenues. To date, almost all of our international revenues have
resulted from our direct sales efforts. In international markets, however, we
expect that we will depend more heavily on third party distributors to sell our
products in the future. The success of our international strategy will depend on
our ability to develop and maintain productive relationships with these third
parties. The failure to develop key international markets for our products could
cause a reduction in our revenues. Additional risks related to our international
expansion and operation include:
- difficulties of staffing, funding and managing foreign operations;
- our dependence on the sales efforts of our third party distributors;
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- longer payment cycles typically associated with international sales;
- tariffs and other trade barriers;
- failure to comply with a wide variety of complex foreign laws and
changing regulations;
- exposure to political instability and economic downturns;
- failure to localize our products for foreign markets;
- restrictions on the export of technologies;
- potentially adverse tax consequences;
- reduced protection of intellectual property rights in some countries;
and
- currency fluctuations.
We sell products outside the United States in U.S. dollars. We do not
currently engage in any hedging transactions to reduce our exposure to currency
fluctuations as a result of our foreign operations. We are not currently ISO
9000 compliant, nor are we attempting to meet all foreign technical standards
that may apply to our products. Our failure to develop our international sales
channel as planned could cause a decline in our revenues.
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION
MAY BE IMPAIRED.
Our success depends on our ability to protect our proprietary rights to the
technologies used in our products, and yet the measures we are taking to protect
these rights may not be adequate. If we are not adequately protected, our
competitors could use the intellectual property that we have developed to
enhance their products, which could harm our business. We rely on patent
protection, as well as a combination of copyright, trade secret and trademark
laws, and nondisclosure and other contractual restrictions to protect our
proprietary technology, but these legal means afford only limited protection.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. In addition, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as do the laws of the United States. We recently settled a lawsuit to
protect our intellectual property rights. Further litigation may be necessary to
enforce our intellectual property rights, which could result in substantial
costs and diversion of management attention and resources.
WE MAY BE SUED FOR PATENT INFRINGEMENT.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. As the number of
competitors in the application server and web content acceleration server
markets grow and the functionality of products in different market segments
overlaps, the possibility of an intellectual property claim against us
increases. For example, we may inadvertently infringe a patent of which we are
unaware. In addition, because patent applications can take many years to issue,
there may be a patent application now pending of which we are unaware, which
will cause us to be infringing when it is issued in the future. To address these
patent infringement or other intellectual property claims, we may have to enter
into royalty or licensing agreements on disadvantageous commercial terms.
Alternatively, we may be unable to obtain a necessary license. A successful
claim against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement or other
intellectual property claims, with or without merit, which are brought against
us could be time consuming and expensive to litigate or settle and could divert
management attention from administering our core business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our current stockholders sell substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market, the market price of our common stock could fall. In
addition, these sales of common stock could impede our ability to raise funds at
an advantageous price through the sale of securities. As of June 30, 2001, we
had
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approximately 20 million shares of common stock outstanding. Virtually all of
our shares, other than shares held by affiliates, are freely tradable. In
addition, shares held by affiliates are tradable, subject to the volume and
other restrictions of Rule 144.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, AND WE HAVE RECEIVED
A NOTICE FROM NASDAQ REGARDING THE POSSIBLE DELISTING OF OUR STOCK FROM THE
NASDAQ NATIONAL MARKET SYSTEM.
Our stock price has been and may continue to be highly volatile, and we may
be delisted from the Nasdaq National Market System. The market price of our
common stock has declined significantly in recent months, and we expect that it
will continue to be subject to significant fluctuations, as a result of
variations in our quarterly operating results and the overall volatility of the
Nasdaq stock market. These fluctuations have been, and may continue to be,
exaggerated because an active trading market has not developed for our stock.
Thus, investors may have difficulty selling shares of our common stock at a
desirable price, or at all. Our common stock is currently trading below the
$1.00 per share requirement for continued listing on the Nasdaq National Market,
and we have received notice from Nasdaq that our common stock may be delisted
from the Nasdaq National Market if we are unable to regain compliance with this
requirement for 10 consecutive days by October 1, 2001. We currently intend to
seek a Nasdaq hearing for appeal if and when we receive such notice of
delisting. The maintenance of our Nasdaq National Market System listing is very
important to us. We intend to take appropriate actions, as necessary, including
seeking shareholder approval for a reverse stock split in order to maintain our
Nasdaq National Market System listing. If our efforts in this regard are
unsuccessful, our common stock will be delisted from the Nasdaq National Market
System. If a delisting from the Nasdaq National Market were to occur, our common
stock would likely trade on the OTC Bulletin Board or in the "pink sheets." Such
alternatives are generally considered to be less efficient markets and are not
as broad as the Nasdaq National Market or the Nasdaq SmallCap Market. This lack
of liquidity and visibility could further decrease the price of our common
stock. In addition, delisting from the Nasdaq National Market might negatively
impact our reputation and consequently our business.
In addition, the market price of our common stock may rise or fall in the
future as a result of many factors, such as:
- variations in our quarterly results;
- announcements of technological innovations by us or our competitors;
- introductions of new products by us or our competitors;
- acquisitions or strategic alliances by us or our competitors;
- hiring or departure of key personnel;
- the gain or loss of a significant customer or order;
- changes in estimates of our financial performance or changes in
recommendations by securities analysts;
- market conditions and expectations regarding capital spending in the
software industry and in our customers' industries; and
- adoption of new accounting standards affecting the software industry.
The market prices of the common stock of many companies in the software and
Internet industries have experienced extreme price and volume fluctuations,
which has often been unrelated to these companies' operating performance. In the
past, securities class action litigation has often been brought against a
company after a period of volatility in the market price of its stock. We may in
the future be a target of similar litigation. Securities litigation could result
in substantial costs and divert management's attention and resources, which
could harm our business.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
AND COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER
APPROVAL.
As of June 30, 2001, executive officers and directors, and entities
affiliated with them, owned approximately 28% of our outstanding common stock.
Accordingly, these stockholders may, as a practical matter, continue to control
the election of a majority
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of the directors and the determination of all corporate actions. This
concentration of voting control could have the effect of delaying or preventing
a merger or other change in control, even if it would benefit our other
stockholders.
THE ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD DISCOURAGE A TAKEOVER.
Provisions in our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions may also discourage proxy
contests or make it more difficult for stockholders to take corporate action.
These provisions include the following:
- establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
- authorizing the board to issue preferred stock;
- prohibiting cumulative voting in the election of directors;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for election
of the board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND DILUTE
OUR STOCKHOLDERS.
As part of our business strategy, we expect to review acquisition prospects
that we believe would be advantageous to the development of our business. While
we have no current agreements or negotiations underway with respect to any major
acquisitions of third-party technology, we may make acquisitions of businesses,
products or technologies in the future. If we make any acquisitions, we could
take any or all of the following actions, any of which could materially and
adversely affect our financial results and the price of our common stock:
- issue equity securities that would dilute existing stockholders'
percentage ownership;
- incur substantial debt;
- assume contingent liabilities; or
- take substantial charges in connection with the impairment of goodwill
and amortization of other intangible assets.
Acquisitions also entail numerous risks, including:
- difficulties in assimilating acquired operations, products and
personnel with our pre-existing business;
- unanticipated costs;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have limited or no prior
experience; and
- potential loss of key employees from either our preexisting business or
the acquired organization.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business.
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WE HAVE NOT DESIGNATED ANY SPECIFIC USE FOR THE NET PROCEEDS OF THE COMPANY'S
INITIAL PUBLIC OFFERING OF COMMON STOCK, AND THUS MAY USE THE REMAINING NET
PROCEEDS TO FUND OPERATING LOSSES, FOR ACQUISITIONS OR FOR OTHER CORPORATE
PURPOSES.
We have not designated any specific use for the net proceeds of our initial
public offering of common stock. As a result, our management and board of
directors have broad discretion in spending the remaining net proceeds of that
offering. We currently expect to use the remaining net proceeds primarily for
working capital and general corporate purposes, funding product development and
funding our sales and marketing organization. In addition, we may use a portion
of the remaining net proceeds for further development of our product lines
through acquisitions of products, technologies and businesses.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Sensitivity. Our operating results are sensitive to changes in
the general level of U.S. interest rates, particularly because most of our cash
equivalents are invested in short-term debt instruments. If market interest
rates were to change immediately and uniformly by ten percent from levels at
June 30, 2001, the interest earned from our short-term investments for the six
months ended June 30 would change by approximately $12,000.
Foreign Currency Fluctuations. We operate in several international locations
using local currencies for the payment of employees and suppliers; however, we
did not have any significant net balances that are due or payable in foreign
currencies at June 30, 2001. A hypothetical ten percent change in foreign
currency rates would have changed the results of operations by approximately
$20,000 for the six months ended June 30, 2001. We do not hedge any of our
foreign currency exposures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 6, 1999, the Company filed a patent infringement action in the
United States District Court for the Northern District of California against The
Object People Inc. and The Object People (U.S.) Inc. (collectively, "TOP"),
Persistence Software, Inc. v The Object People Inc., et al., Case No. C 99-5182
MMC (N.D. Cal.). On December 14, 1999, the Company filed a similar action
against Secant Technologies, Inc. ("Secant"), Persistence Software, Inc. v
Secant Technologies, Inc., Case No. C 00-20210 SW (N.D. Cal.).
The action against Secant was settled in January 2001. The action against TOP
was settled in July 2001.
The Company is not currently subject to any material legal proceedings,
though it may from time to time become a party to various legal proceedings that
arise in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Sales of Unregistered Securities
On June 28, 2001, the Company issued to RCG Capital Markets Group, Inc. a
warrant to purchase up to 80,000 shares of common stock, at a purchase price
equal to $0.57 per share in connection with the engagement of RCG Capital
Markets Group, Inc. by the Company. The issuance of the above warrant was deemed
to be exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act of 1933, as amended, as a transaction by an issuer
not involving any public offering. RCG Capital Markets Group, Inc. may exercise
the warrant in accordance with the following schedule: (i) 20,000 shares of
common stock were exercisable as of June 28, 2001; and (ii) 60,000 shares of
common stock shall become exercisable on or after June 29, 2006, subject to
certain shares becoming exercisable earlier upon the achievement of certain
milestones or events.
(b) Use of Proceeds
Our registration statement on Form S-1, SEC File No. 333-76867, for our
initial public offering of common stock became effective on June 24, 1999. We
registered and sold an aggregate of 3,450,000 shares of common stock under the
registration statement at a per share price of $11.00. Our underwriters were
BancBoston Robertson Stephens, U.S. Bancorp Piper Jaffray, and Soundview
Technology Group. Offering proceeds, net of aggregate underwriting commissions
and discounts of $2.7 million and other offering
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transaction expenses of $1.1 million, were $34.1 million. None of the
underwriting commissions and discounts or other offering transaction expenses
were direct or indirect payments to our directors, officers, or holders of 10%
or more of our stock. From June 24, 1999 through June 30, 2001, we have used the
net offering proceeds as follows:
Working capital expenditures $19.5 million
Acquiring property and equipment 2.2 million
Acquiring technologies 2.9 million
-------------
24.6 million
Investing in cash and cash equivalents
and in short-term, investment grade,
interest-bearing securities 9.5 million
-------------
$34.1 million
-------------
Each of the above amounts represents our best estimate of our use of the net
proceeds. None of the net offering proceeds were paid directly or indirectly to
our directors, officers, or holders of 10% or more of our stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 7, 2001, we held our 2001 annual meeting of stockholders. The
following summarizes the matters submitted to a vote of the stockholders:
1. The election of one (1) Class II director to serve until the Annual
Meeting of the stockholders for the year ending December 31, 2003:
BROKER
NON-
NOMINEE IN FAVOR OPPOSED ABSTAIN VOTES
------- ---------- ------- ------- ------
Sanjay Vaswani 13,911,582 89,854 15,410 0
2. The amendments to the Company's 1997 Stock Plan: (1) to increase the
number of shares reserved for issuance under the plan, effective as of the
Annual Meeting date, by 145,000 shares and (2) to increase the number of
shares by which this plan shall be automatically increased (the "evergreen
provision") on the first day of each year beginning in 2002, 2003, 2004 and
2005 from (i) the lesser of 840,000 shares, 4.33% of the outstanding shares
of Common Stock on the last day of the immediately preceding year, or such
lesser number of shares as determined by the Board of Directors, to (ii) the
lesser of 985,000 shares, 4.94% of the outstanding shares of Common Stock on
the last day of the immediately preceding year, or such lesser number of
shares as determined by the Board of Directors.
BROKER
NON-
IN FAVOR OPPOSED ABSTAIN VOTES
---------- ------- ------- ---------
5,756,822 747,539 17,063 7,495,422
3. The amendment of the Company's 1999 Directors Stock Option Plan (the
"Directors Plan"): (i) to increase the number of shares underlying each
Subsequent Option (as defined in the Directors Plan) automatically granted to
non-employee directors who become members of the Board of Directors after
June 24, 1999 (the effective date of the Company's initial public offering)
from (A) an option to purchase 4,000 shares of Common Stock on the first day
of each fiscal year beginning at least two years after the date such person
becomes a member of the Board of Directors, to (B) an option to purchase
10,000 shares of Common Stock on the first day of each fiscal year after the
date of the Second Option grant (as defined in the Directors Plan), and (ii)
to increase the number of shares underlying each option automatically granted
to non-employee directors who became members of the Board of Directors on or
before the effective date of the Company's initial public offering from (A)
an option to purchase 4,000 shares of Common Stock on the first day of each
fiscal year, to (B) an option to purchase 10,000 shares of Common Stock on
the first day of each fiscal year.
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BROKER
NON-
IN FAVOR OPPOSED ABSTAIN VOTES
---------- ------- ------- ------
13,738,756 251,560 26,530 0
4. To ratify the appointment of Deloitte & Touche LLP as the independent
auditors of the Company for the fiscal year ending December 31, 2001.
BROKER
NON-
IN FAVOR OPPOSED ABSTAIN VOTES
---------- ------- ------- ------
13,968,284 41,592 6,970 0
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
4.2 Common stock warrant, warrant No. W-CS1, dated June 28, 2001,
issued to RCG Capital Markets Group, Inc.
10.6++ 1997 Stock Plan (as amended) and forms of Stock Option Agreement
and Common Stock Purchase Agreement,
10.8++ 1999 Directors' Stock Option Plan (as amended) and Form of Option
Agreement,
10.12 Registration Rights Agreement dated as of June 28, 2001 between
Persistence Software, Inc. and RCG Capital Markets Group, Inc.
++ Supersedes previously filed exhibit.
(b) REPORTS ON FORM 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERSISTENCE SOFTWARE, INC.
By: /s/ CHRISTINE RUSSELL
----------------------------------
CHRISTINE RUSSELL
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: August 14, 2001
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.2 Common stock warrant, warrant No. W-CS1, dated June 28, 2001, issued
to RCG Capital Markets Group, Inc.
10.6 1997 Stock Plan (as amended) and forms of Stock Option Agreement and
Common Stock Purchase Agreement,
10.8 1999 Directors' Stock Option Plan (as amended) and Form of Option
Agreement,
10.12 Registration Rights Agreement dated as of June 28, 2001 between
Persistence Software, Inc. and RCG Capital Markets Group, Inc.